Video game investors are being offered a deal on Take-Two Interactive (TTWO 0.72%) that might help elevate their portfolio returns over the next several years. The video game developer's shares dropped below $160 by mid-March and are down 5% so far in 2024 compared to the wider market's 10% gain.
That performance gap can be explained by Take-Two's early February earnings update that contained some discouraging news about its short-term growth prospects. Yet the developer still expects a flood of new content releases through mid-2025. Let's look at why Take-Two lowered its fiscal year outlook while confirming plans to dramatically boost sales and earnings next year.
Hits and misses
The company posted a 3% sales drop as net bookings fell to $1.3 billion from $1.4 billion a year ago. That's about the same rate of decline that investors have seen in the past year, including Take-Two's 4% dip in the prior quarter.
On the bright side, the developer achieved strong sales for titles in the Grand Theft Auto and Red Dead Redemption franchises, along with higher spending in its casual games like Toon Blast. Those successes were outweighed by weaker mobile advertising trends and poor uptake for the latest NBA 2K title, however.
While Take-Two has plans to support the title with promotions and more content, the soft showing will hurt the wider business. Management lowered its fiscal 2024 outlook to call for net bookings of roughly $5.3 billion, down from the prior range of between $5.45 billion and $5.55 billion.
That's not a significant reduction. However, it does illustrate a key risk involved in owning this video game stock -- management's high expectations aren't always met once a title moves from development into facing the scrutiny of gamers.
Losses continue
Take-Two's finances still look weak although most of that problem is temporary. Operating cash flow fell into negative territory over the past nine months. Net losses expanded to $841 million from $514 million a year ago.
TTWO Cash from Operations (TTM) data by YCharts
That red ink shrinks significantly when you adjust for one-time impairment and goodwill charges; yet, Take-Two is still underperforming its peer Electronic Arts (EA 0.46%). EA posted a modest increase in bookings this past quarter and net income jumped to $290 million from $204 million. Despite those differences, both video game stocks are valued at about the same price-to-sales ratio of 5.
Time to hit pause?
Take-Two's management team still sees a huge year ahead in fiscal 2025, which begins in early April. That period will feature the release of several large titles, including the highly anticipated Grand Theft Auto 6. Take-Two believes these launches give it a clear shot at hiking its bookings by about 40% to near the $8 billion that EA generates each year.
Yet this past quarter's results should give investors pause about that prediction. Gamers are being careful about where they decide to spend their money right now, and there is no shortage of competing digital content in the market. Even a modest miss for a key title could lead to a significant downgrade in the fiscal 2025 outlook.
If you're comfortable with that risk, though, then Take-Two might still be an attractive buy ahead of its projected 40% annual sales spike. However, given its net losses and negative cash flow, I'd simply watch this stock for the time being.
