This week, Wired ran an article called “How Fortnite, a ‘Gamer’s Game’, Took Over the World.” If that’s not a great snapshot of the frenzy around the Epic Games title — particularly since the addition of its free-to-play battle royale — I’m not sure what is.
From an investment standpoint, though, much of the buzz around Fortnite relates to whether or not it’s stealing gamers and thus profits away from its publicly traded rival Take-Two Interactive Software, Inc (TTWO), best known for its smash hit Grand Theft Auto. But personally, I don’t think Fortnite will damage Take-Two stock in a meaningful way.
For Take-Two Stock, Focus on the Fundamentals
Investing in stocks by chasing the popularity of video games is a bit of a fool’s errand. Investors need to focus on the fundamentals. And the bottom line is that Take-Two stock is supported by a strong portfolio of its own and definitely has growth potential. The question is how much that potential is worth. Fortnite is only a footnote in that equation.
As Piper Jaffray analyst Michael Olson noted, the games are for completely different markets, with the average user base for Fortnite in their early teens. Grand Theft Auto fans tends to have a few years on them.
As a result, Olson reiterated his Take-Two stock buy recommendation and $127 price target. The stock has already realized a lot of those gains, though.
Take-Two stock has gone from $66 per share to nearly $116 per share in the last 12 months but has moved sideways, more or less, since the start of the new year. Many are concerned about Fortnite. But really, the lull is consistent with the broader market.
The bigger thing to focus on is the fact that TTWO lost value on the heels of an earnings miss and soft outlook this week.
The company said it expects just break-even earnings for its current quarter, which will end in June. That’s far below the Street’s current 45-cents-per-share estimate. And it’s especially disappointing when you consider the Street estimate was a full dollar higher three months ago.
The Bottom Line for Take-Two Stock
Even factoring in that disappointment, Take-Two Interactive looks solid. The long-term trends are all bullish. Gross profit has more than doubled since 2015 while its net income has gone from $279 million in the red to $67 million in the black. Its assets outweigh its liabilities. Some of that growth is organic; sales growth for the current year is only expected to tally 6%, but a whopping 44% top-line expansion is expected for 2019.
The stock sports a forward P/E of 23. While that may seem like a lot when you consider the supposedly break-even earnings expected for the current quarter, also consider that it’s less than five-year growth of 30%that’s on tap, including 26% this year and 50% on top of that the year after.
I don’t think Fortnite is enough to sway those estimates, and those estimates are pretty appealing. Given the soft short-term outlook, I’d buy TTWO — but only a dip.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.