Take-Two Interactive Software (TTWO 0.72%) bolstered its offerings with the acquisition of Farmville producer Zynga last year, but overall profitability for the company fell far behind the previous year's figures. Despite this, Take-Two's share prices continue to climb, making the popular video game company a potential candidate for savvy investors. Those same investors should exercise caution, however, as many headwinds lie between Take-Two and its return to profitability.
Few core titles remain slated for 2024 release
With both Rockstar and 2K Games in its lineup, Take-Two has plenty of avenues for releasing immersive core titles, those AAA-quality top-tier games that drive both interest and revenues in both the lead-up and release. Officially, the company has only two named immersive core titles slated for release in the next year. They are both ongoing sequels with WWE 2K24 and NBA 2K24 under the 2K Games lineup. The buzz around a sequel to Grand Theft Auto VI continues to build with no official launch date.
This indicates the company remains unlikely to see big profitability from the immersive core of its offerings, leaving it to rely on independent, mobile, mid-core, and revamped games to carry its revenues for now. Between those four additional divisions, only another four new titles have fiscal year 2024 release expectations, but they are some heavy hitters. Along with the strikingly well-reviewed After Us and Lego 2K Drive games coming out this year, Star Wars Hunters and Grand Theft Auto: The Trilogy for mobile fill out the known upcoming game slate.
Investors may note there are additional unannounced titles also slated for release, but without more details, these represent a risky wager. Just two years ago, in 2021, the company declared it had written off over $53 million for the cancellation of an unannounced title, and Take-Two accepted a $79.1 million impairment charge for the development of software related to unannounced and canceled titles again in 2023.
Recurring revenue from online games only reaches so far
While the sale of big new games accounts for a large part of Take-Two's revenue, it also receives income year-round from its online portfolio. Recurrent consumer spending (RCS) remains a huge part of Take-Two's long-term strategy. It represents a small portion of revenue, but rose 115% in the fourth quarter. Adding Zynga to the mix greatly bolstered the potential of this division for additional revenue over time.
Grand Theft Auto Online and Zynga's lineup of monetized mobile games bring in year-round income well past the first sale. The online versions of the games have done so well that the company plans to move forward with further options to include subscriptions, direct-to-consumer sales, esports, and web3 opportunities.
While the acquisition of Zynga remains a big move for Take-Two, it's only part of the consolidation of the AAA-quality video game industry. Microsoft continues to move forward with its acquisition of Activision Blizzard, which could pose a big challenge for smaller companies and even make industry giant Take-Two or its subsidiaries potential buyout targets in the future.
Take-Two remains a hold, but could also be a high-risk buy
This accumulation of headwinds for Take-Two comes with more than a few silver linings. The company does have many unannounced titles in the works. Its balance sheets remain strong, with $827 million in cash and equivalents available, indicating a high likelihood of bringing those titles to the consumer.
The current ramp-up in share prices seems easily attributed to the hype surrounding titles with no official announcement by the company, and this delivers a clear sign of consumer interest. This commonly occurs with video game stocks as speculation, development, and marketing cycles come and go. With share prices on the move up, savvy investors should likely hold instead of selling for now, as a return to profitability could see Take-Two share prices seeing new highs closer to 2021 performance.
Buyers may also have plenty of opportunity due to the same cycle to pick up shares at lower prices, without the risk of bad news from cancellations eating into their investments as people wait for firm details on ambiguous launch dates and titles. Those willing to take the risk may well find themselves riding a wave that may one day lead to returned profitability, but this course represents a rollercoaster instead of a slow build to profits.
