Take-Two Interactive (NASDAQ:TTWO) continues to sell off. Despite strong sales of its core offerings, near-term challenges have weighed down the stock. Now, TTWO stock has fallen to levels not seen since the spring.
The fundamentals of Take-Two stock remain strong. However, solid financials have not translated into stock price gains. Due to this negative market psychology, winning with TTWO stock will require a unique set of gaming skills.
Setbacks Continue to Plague TTWO Stock
Like many tech equities, TTWO stock endured a brutal selloff this fall. Since the highs of early October, it has fallen by about 27%. That drop factors in the 16% decline in November and an 8% drop month to date. The company beat estimates in its Nov. 30 earnings report. However, a lower-than-expected outlook sent shares falling. Shares fell further on news that the online version of the newly released Red Dead Redemption 2 game had a “painfully slow” earn rate for players trying to accumulate virtual cash.
However, this pessimism should not mean a similarly gradual earn rate for TTWO stock. Investors should remember TTWO has seen less of a decline than peers such as Electronic Arts (NASDAQ:EA) or Activision Blizzard (NASDAQ:ATVI). Moreover, the company discovered this issue during beta testing, not after its full launch.
Furthermore, Take-Two has benefited from two successful game releases in recent months. It saw strong sales in NBA 2K19, which was released in September. This became the biggest launch in the history of the series. The company also enjoyed great success with the game console version release of Red Dead 2, selling around 17 million units in the first eight days of release.
Irrational Pessimism Drives TTWO Stock Right Now
Such sales numbers likely motivated Bank of America (NYSE:BA) to reiterate its forecast on TTWO. Despite the challenges, it stuck to its $156-per-share price target. Many, like my colleague Josh Enomoto, agree. He called TTWO the “perfect gift for contrarian investors.” I agree with both analyses. As of this writing, Mr. Enomoto’s prediction has not come to pass, but I believe he will be right in the end.
Enomoto also makes an important point that defines TTWO at this moment — markets can stay irrational longer than many investors can remain solvent. Right now, TTWO stock seems to want to take leave of its senses. Wall Street reacts to Take-Two stock like the jackpot recipient who wins $999,000 and complains that it fell short of $1 million. Good news such as the successful Red Dead 2 launch does not move the needle. However, a slight disappointment in earnings outlooks prompts investors to sell.
Further, TTWO stock seems more prone to head fakes than a game of NBA 2K19. Amid this decline, the stock saw a 15% increase in late October only to give that back over the next two weeks. Over the last two months, the stock has seen many of these short-term moves higher that led to further declines. Such moves make calling a bottom frustratingly difficult.
Winning With TTWO Stock Will Require Gaming
Despite this challenge, I would not discourage those who want to buy TTWO stock. However, I will urge buyers to utilize gaming skills of their own, approaching TTWO both slowly and strategically. Right now, buying should only occur in small increments, preferably on down days. I would stay with those small-increment buys until the stock can prove that it will move up and hold that gain for more than a few days. Investors can only buy confidently when they know that upward moves constitute more than just a head fake.
The Bottom Line on TTWO Stock
Although TTWO stock has placed itself on a path of solid revenue and earnings growth, winning with TTWO will require gaming skills. Take-Two continues to succeed with the latest versions of games such as Grand Theft Auto V, NBA 2K 19 and, now, Red Dead Redemption 2.
However, setbacks have weighed on TTWO stock and it has lost over 25% of its value in recent weeks. Given that negative news currently holds more influence than positive occurrences, investors should take a cautious approach with this stock. However, once its strong fundamentals gain more appreciation, I think the Take-Two stock will appreciate with those sentiments.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.