Take-Two Interactive (NASDAQ:TTWO) is slated to report its earnings for its fourth quarter on Monday, May 13 after the market closes. After TTWO stock fell sharply in the wake of its Q3 earnings report in February, the shares have rebounded.
TTWO stock may move again after the company reports its results next week for its quarter that ended in March. Given the uncertainty as to the company’s direction, I think investors should wait until after its earnings before making any moves with Take-Two stock.
Investors Will Likely Focus on the Company’s Revenue
For TTWO’s Q4, analysts, on average, expect the company to report earnings per share of 75 cents. In the same quarter last year, TTWO’s EPS came in at 70 cents.
Analysts’ consensus revenue estimate is $506 million, 23% above the year-ago figure of $411.37 million. Despite the expected significant increase in the company’s top line, the consensus estimate is significantly below the $530 million to $580 million guidance that the company issued back in February.
When I wrote a column about TTWO stock in December, I said it was underappreciated, given its fundamentals. I also urged investors to be cautious about TTWO stock. My warning turned out to be accurate, as TTWO stock has lost almost 16% of its value since the earnings report it issued in February. Most blamed the selloff of Take-Two stock on analysts’ falling Q4 revenue estimates.
TTWO stock did not find a bottom until briefly dipping below $85 per share on Feb. 27. For the most part, it has steadily moved higher since then, recovering most of the value it had lost in the wake of its earnings report.
A Different Approach on In-Game Purchases
One has to assume that investors will focus on the company’s revenue. The gaming industry and mobile-gaming companies, such as Zynga (NASDAQ:ZNGA) and Glu Mobile (NASDAQ:GLUU), in particular, depend heavily on in-game purchases. Even TTWO’s long-time peers, such as Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA), have increasingly embraced this model.
Activision now earns the majority of its revenue from these transactions. However, Take-Two has stood out by depending less on in-game purchase than many of its peers. In recent quarters, TTWO has only earned about one-third of its revenue from in-game purchases.
TTWO stock may have been hurt by the company’s position. However, this stand reminds me of Southwest Airlines (NYSE:LUV) refusing to charge its passengers for every checked bag. In the long run, a company can earn some goodwill among its customers by declning to “nickel and dime” them.
Evaluate TTWO Stock Based on Its Strengths and Valuation
Take-Two has also remained true to its strengths. It has avoided mobile gaming completely and still derives around 85% of its revenue from console-based games. The rest of the company’s revenue comes from PC-based games.
But I still think investors need to look at the valuation of TTWO stock. Its 20.4 forward price-earnings ratio represents a multi-year low. Moreover, TTWO stock has surged in recent years. It traded below $10 per share as late as 2012, before peaking at almost $140 per share late last fall.
Today, it trades at about $100 per share. I think that’s a fair valuation for TTWO stock. Consequently, I would not buy Take-Two stock ahead of its earnings. But if TTWO stock drops sharply again following the report, traders should consider buying the shares.
Final Thoughts on TTWO Stock
Last quarter’s post-report selloff and investors’ concerns about TTWO’s revenue indicate that traders should not buy TTWO stock before it reports its results.
Take-Two’s profits probably rose last quarter. Despite analysts’ falling revenue projections, TTWO’s revenue probably rose at least 10% from its year-ago levels.
However, investors have expressed concern about Take-Two’s reluctance to depend heavily on in-game purchases. Its dependence on console games and older gaming franchises has also caused some unease among the owners of TTWO stock.
Still, I think these practices embody sticking to strengths and building goodwill. Consequently, I would prefer TTWO stock over ATVI or EA despite those stocks’ similar multiples. However, with TTWO’s forward PE ratio of just over 2 and the Street’s reticence about its revenues, I think investors should avoid buying TTWO ahead of its earnings.
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.
