Take-Two Interactive Software, Inc. (NASDAQ: TTWO) stock is struggling for two simple reasons. First, the company posted less-than-inspiring quarterly results last month. Secondly, the company is too reliant on sales of its Red Dead Redemption 2 game.
For these reasons, after peaking at around $140, TTWO stock is trading around $105. Given the strong growth prospects of TTWO, is the market undervaluing Take-Two stock?
Take-Two reported second-quarter earnings per share of 22 cents on revenue of $583.42 million. The company’s revenue rose only 1.1% year-over-year. With TTWO stock valued at nearly 20 times analysts’ 2019 consensus earnings estimate, investors are hesitant to pay more for TTWO.
Still, strong demand for the company’s NBA 2K19, Grand Theft Auto V, and Grand Theft Auto Online games enabled TTWO’s operating results to surpass expectations. Most notable are the sales totals from the record launch of NBA 2K19. According to research firm NPD Group, physical and digital sales of the game set records for the launch month of a sports title.
Grand Theft Auto Online sales beat the company’s expectations for the quarter. And GTA V’s total sales of more than 100 million units show the strength of the brand.
Take-Two’s Growth From Red Dead Redemption 2
Red Dead Redemption 2, which took more than 2,000 team members to build, launched on Oct. 26 and was very successful. It was the highest-rated title on the PlayStation 4 and on Xbox One. In just three days, the game brought in $725 million of revenue. Additionally, it sold more units in eight days than the original title in its first eight years.
As a result, TTWO has raised its 2019 net booking and operating cash flow guidance. In the wake of such a successful launch, why is TTWO stock trading far below the average analyst price target of $146.57?
The Headwinds Holding Back TTWO Stock
Until TTWO gave online players large amounts of virtual money, the biggest complaint about Red Dead 2 was the high cost of buying products on the game. It would take a long time to collect enough points to purchase anything. The policy change should solve the problem.
However, until Take-Two builds mass appeal for Red Dead 2 online, the online game will neither exceed the popularity of Grand Theft Auto Online nor make meaningful money for the company.
Potential Near-Term Catalysts for TTWO Stock
TTWO stock could get a boost from the company’s release last month of its Civilization VI game for Nintendo’s (OTC:NTDOY) Switch console. In the coming months, TTWO will release updates for Grand Theft Auto Online and WWE SuperCard.
The Outlook of TTWO Stock
Take-Two believes that higher recurrent customer spending on its new NBA game and the positive outlook of Red Dead Redemption 2 will result in net bookings as high as $2.9 billion, 43% above last year’s level.
Digitally-delivered bookings are expected to increase 30%. The company’s GAAP net revenue is expected to come in at $2.55 billion – $2.65 billion. If these strong numbers materialize, the selling pressure on TTWO stock should not last for very long, assuming that worries about the U.S.-China trade war ease.
As of this writing the author does not own shares in any of the companies mentioned.