Investors might have some unreasonably high expectations for Take-Two Interactive's (TTWO +4.41%) business. The video game publisher's shares are trouncing the market so far in 2023 even through declining sales and rising net losses this year.
Investing is about the future, though, and that's where things start to look brighter for the owner of hit franchises like Grand Theft Auto and Words With Friends. Let's look at a few reasons Wall Street is so optimistic about this stock's potential.
The latest results
To be sure, the latest operating results were uninspiring, reflecting the demand pressure that's facing much of the video game industry today. Take-Two's bookings, a measure of sales to consumers, were down 4% to $1.44 billion in the fiscal second quarter, which ended in late September.
The net loss landed at $543 million, more than double last year's figure. It's not easy to square that result against Take-Two's soaring stock in 2023.
NASDAQ: TTWO
Key Data Points
That result looks even worse compared to industry peer Electronic Arts, which notched a 4% uptick in bookings. EA got a big lift from the latest editions from its EA Sports franchises while Take-Two struggled a bit more to maintain growth following big audience gains a year ago. Spending in EA's subscription-based service was up 1%, while Take-Two's comparable metric declined 7%.
A big pipeline
Investors aren't expecting this performance gap to stretch on for much longer, though. While all video game companies hype their upcoming content, Take-Two has a stuffed pipeline to legitimately brag about. The publisher is planning 17 large releases over the next two fiscal years, partly because of a few delays from the current year.
These launches include some brand-new intellectual property that management believes will propel the business toward the top of the industry in annual sales. Bookings should reach around $8 billion by fiscal 2025, it says, up from the projected $5.5 billion in fiscal 2025. Most Wall Street pros agree and are forecasting that revenue will rise by a blazing 44% next year.
Risky business
There are some key risks involved in buying this stock right now. That projected sales increase is hypothetical at this point, for example, and it relies on factors such as a positive reception to Take-Two's games, no further development delays, and solid consumer spending over the next 18 months.
The second big risk involves finances. Take-Two generated $750 million of net losses over the last six months, up from $361 million in the year-ago period. It's never good to see expanding losses, but investors' financial concerns are amplified during times of slowing sales trends and rising interest rates.
Lastly, there's the stock's valuation, which has become elevated in 2023. You'll have to pay about 5 times annual sales for this business, the same price-to-sales ratio that Wall Street has assigned to EA. Yet EA is growing faster and is expanding its profit margins, in contrast to Take-Two's unfortunate steps in the other direction.
That's why most investors will want to simply watch this stock for now. There's not a lot of clarity about the company's growth prospects, while earnings just aren't impressive today. For now, consider cheaper, more-stable options in the video game industry like EA, but continue following Take-Two as more details emerge about its aggressive fiscal 2025 plans.
