It’s been a rough few months for gaming stocks. Negative investor sentiment and uncertainty regarding the future of the industry has weighed heavily on gaming companies causing their share prices to nosedive. Take-Two Interactive Software (NASDAQ:TTWO) is one such firm whose share price has fallen nearly 30% since the beginning of October despite there being very little news to warrant such a reaction.
Take-Two stock’s epic decline can be explained by two factors: overall market sentiment and Fortnite.
Gaming stocks were all the rage at the beginning of 2017 as investors bet on technological improvements, but with economic worries overshadowing the market, video game companies have been abandoned in favor of safer plays. Plus, the massive success of Epic Games’ Fortnite, a free-to-play game that popularized “battle royale” modes, caused investors to re-think their bets in the gaming space.
Neither of those things is going away any time soon, but TTWO stock actually shines brightest when you hold it up against its industry risks. First of all, Take-Two stock has an iron-clad balance sheet. The company is holding on to more than $1 billion in cash and has minimal debt obligations, making it attractive to investors looking for a financially sound company that won’t sink at the first sign of trouble.
Plus, most agree that Take-Two stock has some of the best content in the industry. The company’s “opening weekends” rival that of Hollywood, and its games are known for blazing a path forward in gaming, garnering positive critical reception along the way. So while Fortnite was a smash hit among gamers, that is unlikely to affect their decision to buy “Red Dead Redemption” or “Grand Theft Auto” titles. In fact, a survey showed that Fortnite was more of a disruption for other shooting games, like “Call of Duty” and Overwatch.
Take-Two has kept a sharp focus on what’s working with consumers and strayed very little form that formula. The firm tends to stick to proven franchises, which means it’s able to focus on quality sequels rather than starting from scratch with entirely new content. The firm has been able to create new monetization opportunities with GTA Online while also responding to consumer demands by adding a multiplayer mode.
Not All Roses
While this has been a boon to Take-Two’s stock price so far, it’s worth noting that this also adds a lot of risk because the firm is heavily dependent on the success of its franchises. If TTWO fails to hit the mark with its next “Grand Theft Auto” installment, it would be disastrous to Take-Two stock because not only does the game carry high production costs, but Take-Two isn’t large enough to take a misstep like that in stride.
Plus, despite losing a huge chunk of its value over the past three months, I wouldn’t say TTWO is a cheap buy. Yes, compared to its previous value it’s cheap, but when you look at the firm against its competitors that’s not the case. Take-Two wasn’t the only video game stock that tumbled at the end of 2018 — Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA) have fallen 44% and 26%, respectively, since early October, which has put all three companies on level playing fields when it comes to price-earnings P/E ratios.
That means you can get a much larger, more diversified companies with better revenue projections at a similar valuation.
Bottom Line on TTWO Stock
Take-Two stock has a lot going for itself and so far its strategy of sticking to franchises and high-quality sequels that resonate with users is working. That strategy is risky, however … Although I agree TTWO stock has long-term potential, I don’t think it’s the best buy in the industry now that some of its larger peers’ valuations have come back down to earth.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.