Judging by its stock price rally this year, Wall Street sees nothing but fun and games ahead for Take-Two Interactive (TTWO 0.04%). Shares are up 50% so far in 2023, compared with a 36% rally in the Nasdaq Composite index. Rival Electronic Arts (EA 0.85%) is trailing that average, meanwhile, gaining just 12% so far in 2023.

Investors are excited about several big new releases on the way from the video game publisher that could launch it into a much higher level of annual sales in calendar year 2024 and beyond. But there are some major risks to that bullish growth thesis. Let's look at the biggest reason to be optimistic about Take-Two's stock, and the one main reason to tread cautiously right now.

Green flag: The packed game release calendar

Take-Two's latest results don't conform to what most investors would expect from a growth stock. Net bookings, a measure of sales to consumers, were down 4% in fiscal Q2. Wall Street pros, on average, project just 4% growth for the full 2024 fiscal year.

Profits aren't impressive, either, with net losses rising over the past six months compared with the same period a year earlier. Yet investors are looking past those challenges toward a potentially fantastic fiscal year ahead.

Take-Two management project that fiscal 2025 (starting on April 1, 2024) will bring massive growth thanks to a flood of major game releases on the way. A few of these launches were delayed out of the current year, but most have been in the development pipeline for many years.

Take-Two has estimated that fiscal 2025 will push sales near $8 billion, up from a projected $5.5 billion in the current year.

"We have great confidence in our multi-year growth trajectory," executives said in a shareholder presentation, "and we believe there are many exciting upcoming catalysts."

Investors seem to agree with that assessment, judging by Take-Two's stock price rally this year.

Red flag: Take-Two's elevated valuation

The big question is whether investors are paying too high of a premium for this growth potential. That is probably the case.

Take-Two is valued at 5 times annual sales today, matching the premium investors are paying for Electronic Arts. EA, meanwhile, is solidly profitable and has a clear path toward steady sales growth in the coming years. Sure, the developer's portfolio isn't expanding dramatically. Wall Street expects sales to rise by just 5% next year. But there's a lot of visibility into that growth while most of Take-Two's projected gains are tied to unannounced, and currently unproven, titles.

These launches could suffer development snags that delay their release or hurt sales. The video game industry might be weaker in fiscal 2025, too. Investors shouldn't ignore these risks while considering whether to buy Take-Two stock at the current elevated price.

Still, if you don't mind some risk, then you might consider establishing a small position in Take-Two before the flood of new releases starts in mid-2024. The stock has a good chance of growing into its premium valuation, if you believe management's bullish outlook on the industry and on the company's packed content portfolio.