Wall Street is playing to win with Take-Two Interactive (TTWO 0.72%) stock right now. The video game developer is handily beating the market in 2023, even as peers like Electronic Arts (EA 0.46%) are generating underwhelming returns. Both companies are preparing for a modest growth year ahead, after all, as gamers become more selective in their spending.
The bullish thesis is compelling for Take-Two, considering all the success it has had in building a larger content portfolio. Yet investors should know about the main risks before buying the stock. With that in mind, let's look at some huge factors likely to influence long-term returns from here.
Buy reason No 1: The portfolio keeps creating growth
Large acquisitions can be disappointing for investors since the costs are concrete and sometimes underestimated, while the benefits frequently don't meet the high expectations that were present when the deal was struck. Luckily, this hasn't been the case with Take-Two's 2022 purchase of Zynga. The move helped push sales higher by 53% year over year in the most recent quarter and catapulted the company into the top ranks of video game publishers.
Between the casual gaming it just added to its platform, its popular sports franchises, and its wide selection of AAA franchises like Grand Theft Auto, Take-Two is now positioned to generate consistently positive sales growth through shifting gamer preferences and the occasional flop. Management forecasts roughly $5.5 billion of revenue this fiscal year, not too far from the $7.6 billion that Electronic Arts is expecting in 2023.
Buy reason No: 2: The pipeline is promising
Take-Two and EA are both in cost-cutting mode, though, having cut out several planned launches in recent months to focus more on likely winners. Gamers are tilting spending toward established franchises as they look to save cash.
But Take-Two isn't counting on this trend lasting for long. In fact, it is preparing for its biggest year by far in fiscal 2025 when it comes to property launches. Executives haven't discussed exact details around the titles except to say that several "groundbreaking" releases are on tap. In a recent conference call with analysts, management went so far as to put numbers behind those bullish comments.
Fiscal 2025 should put Take-Two on trajectory for achieving $8 billion in annual sales, and ample cash flow. "We expect to sustain this momentum by delivering even higher levels of operating results in fiscal 2026 and beyond," Take-Two management said in mid-May.
Reason for caution: Losses
Take-Two hasn't outlined when the company will likely return to net profitability, though, following the costly Zynga acquisition. Net loss was $1.1 billion last year, for example, mainly thanks to acquisition and integration expenses. Both Activision Blizzard (ATVI) and EA are generating nearly 20% operating margins today while Take-Two's comparable figure is deeply negative.
EA Operating Margin (TTM) data by YCharts
Those losses, Take-Two's soaring stock price, and the fact that most of its big growth gains are at least a year away, all count as reasons to be cautious here. There are many ways in which this business can disappoint investors over the short term, including due to persistently sluggish video game demand.
Yet the positives outweigh the negatives here, assuming you can be patient and hold the stock through the next year of volatile results. Take-Two investors might be underwhelmed with the current fiscal 2024, but new levels of success will be unlocked in 2025 and beyond.
