If an enigma exists in the markets today, then it’s video-game maker Take-Two Interactive Software (NASDAQ:TTWO). Thanks to its two primary brands, Rockstar Games and 2K, TTWO stock soared in recent years on the back of compelling game titles. But despite positive news surrounding the organization, TTWO has hit extremely-volatile waters.
Many bulls are left scratching their heads. The most notable catalyst for Take-Two stock is the underlying company’s latest release, Red Dead Redemption 2. In just eight days, the Wild West-themed action-adventure game sold more copies than the original version over its eight-year lifespan.
In actual numbers, we’re talking about 17 million units over that short period. That translates to $725 million in revenue. TTWO calls it “the single-biggest opening weekend in the history of entertainment.”
We’ve all heard hyperbole from CEOs pumping their companies’ equity value. However, Take-Two’s opening weekend was huge. According to Boxofficemojo.com, the biggest-opening weekend in cinema history is Disney’s (NYSE:DIS) “Avengers: Infinity War.” That film raked in $640.5 million worldwide in its opening weekend. It went on to make $2 billion overall.
But I have to point out that the “single-biggest opening weekend” claim is a bit pedantic. The biggest three day opening actually goes to Grand Theft Auto 5, which raked in an astounding $1 billion in just 3 days. However, it was released on a Tuesday.
Still Red Dead Redemption 2 having jumped to nearly three-quarters of a billion in just over a week is huge, and GTA 5 is also a Take-Two title. For me, that’s more than enough reason to consider TTWO stock.
The problem? Wall Street doesn’t share this enthusiasm. Take-Two stock is down nearly 18% just in November. What’s even more bizarre is that management delivered a great beat for its fiscal second-quarter 2019 earnings report.
The common explanation is that the company produced disappointing guidance. Still, is that enough reason to trash TTWO stock?
TTWO Stock Suffers From Disconnect Between Technicals and Fundamentals
It’s common advice that you shouldn’t fight the markets. They can stay irrational longer than you can stay solvent. That said, I completely disagree with the bears. The severe correction in Take-Two stock has gone too far ahead of itself.
Let’s quickly recap the Q2 figures. The Street pegged consensus earnings per share at 93 cents, while the actuals came in at $1.05. More impressively, TTWO rang up $583 million in revenue, against a forecast of $550 million. That’s a meaty 6% positive surprise, which helped lift TTWO stock in extended-hours trading.
The disconnect started to occur when management revealed its guidance for Q3, which anticipates adjusted earnings of $2.55 on $1.43 billion in net sales, or what they term “net bookings.” Analysts called for $2.59 per share on sales of $1.35 billion. On the next day, TTWO stock dropped more than 5%.
But does a 1.5% miss on earnings projections justify this severe fallout? Those who panicked out would say that Take-Two stock deserved its volatility because management should have demonstrated more confidence. After all, “Red Dead Redemption 2” is a groundbreaking title.
I can somewhat understand that argument. However, this logic misses the bigger picture. Investors should consider not just this release’s impressive unit sales but rather, why sales were so outstanding.
In an industry of mindless, transient titles, Take-Two understands that most financially-successful video games feature strong and engaging storylines. It’s not enough merely to throw in pretty graphics and a popular brand name.
Just ask Electronic Arts (NASDAQ:EA). EA essentially hurried the launch of “Star Wars: Battlefront” to coincide with the Force Awakens film release. It did not feature a single-player campaign mode, and gamers fiercely criticized it.
Take some Take-Two stock on the Cheap
When most game makers eschew single-player modes for dynamic, online gameplay, Take-Two stock might seem an anachronistic investment. But clearly, the leadership team knows what they’re doing: Red Dead 2 proved the viability of “old school” games with compelling storylines.
And the only entertainment release that has performed better is Take-Two’s own Grand Theft Auto V.
What those who are panicking out of TTWO stock are not realizing is that they have engaging storylines on lockdown. In an awfully-fickle sector, creating brand loyalty is a gargantuan task. But Take-Two makes it look so easy.
That’s why I didn’t blink an eye when some analysts have called for Take-Two stock to hit $160. Like Apple (NASDAQ:AAPL), TTWO produces addictive products. Something like that doesn’t stay on discount forever.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.