Take-Two Interactive Software (TTWO 0.72%) investors have a big month ahead of them. The video game developer is set to announce its latest quarterly earnings results on Aug. 8, and will likely update its short-term growth targets (along with any shifts in its release calendar) at the same time.
Shares have been in rally mode as that critical date approaches. Take-Two has gained 45% so far in 2023, compared to an 18% rally in the wider market. Rival Electronic Arts is up just 13% in that time.
Let's take a closer look at why Wall Street is so excited about Take-Two stock right now, along with the main reasons to be cautious about making a big commitment to this investment.
Bearish outlook
The bearish argument can be distilled down to the combination of slow growth with a soaring stock price. Take-Two is projecting a nearly flat fiscal year ahead for net sales, after all, in contrast with the stock's rally in 2023.
Management said in mid-May that this forecast "reflects the challenging consumer backdrop" that has gamers scaling back on spending to focus on only a few popular franchises. EA echoed those comments in its last earnings report that called for sales this year to land between $7.3 billion and $7.7 billion compared to last year's $7.4 billion.
And yet Take-Two's stock valuation has jumped from 3 times annual sales to nearly 5 times sales today. That's approaching EA's valuation even though Take-Two is not currently profitable and may lose money again this fiscal year as it works to integrate its Zynga acquisition.
The bullish case
Bulls have plenty of factors they can point to that suggest Take-Two will be in a much stronger financial position in just a few years. The Zynga acquisition is already contributing to growth and has added a huge foothold in the casual gaming market to Take-Two's already established positions in areas like PC and gaming console devices.
But the biggest draw for the stock is around what happens after the current fiscal year is over. Fiscal 2025, which begins next April, is packed with content releases that promise to push Take-Two to the next level. Management has even put numbers behind its positive comments here, saying sales in that year should cross $8 billion while adjusted cash flow surpasses $1 billion.
By comparison, Take-Two is projecting just over $5 billion in sales this year and about $100 million in adjusted annual cash flow.
Play the game
Management might adjust those forecasts in early August, or afterward, to account for shifting demand trends in the industry, delays in content development, or other unpredictable events. That's the main risk in buying the video game stock today -- that the optimism around fiscal 2025 proves to be overblown.
That's why many investors might prefer watching this stock for now. More concrete signs of progress toward profitability might start showing up over the next four quarters, and there will surely be more clarity around economic trends by late 2023. Given Take-Two's expectations for modest sales growth this year, and the stock's surging valuation, the prospects for disappointing shareholder returns are worth considering.
