Investors in video game company Take-Two Interactive (NASDAQ:TTWO) had a tough February. In the final week of the month, the company was hit by the broad sellout triggered by panic over the coronavirus from China.
The start of February was even worse. After Take Two reported its third quarter earnings on Feb. 6, TTWO stock dropped like a rock. The company lost 12% of its value in a single day. Currently trading at just over $117 ($10 below its Feb. 6 close), Take Two stock is still feeling a Q3 earnings hangover.
After a 2019 that saw TTWO rise as much as 28% before dropping back to post a 17% gain on the year, what does 2020 hold?
Q3 Earnings Report Underwhelms
After the bell on Feb. 6, Take Two released its earnings for fiscal Q3 2020.
GAAP earnings of $1.43 per share were down 8.9% year-over-year. GAAP net revenue of $930.1 million was down 25.5% compared to the $1.249 billion reported for Q3 2019. Both of those numbers came in under analyst expectations.
Game consoles — which represent nearly three quarters of the company’s revenue — saw game sales decrease by over 40%. That was partially made up for by surging PC platform sales, but Take Two is clearly feeling the impact of the aging Xbox One and Playstation 4.
However, there was some good news in there. Customer spending on in-game purchases was up, led by Rockstar’s Grand Theft Auto Online, which saw its online revenue grow 54% YoY.
The market reaction to the company’s Q3 earnings was swift and bloody. TTWO stock dropped from $127.74 to $112.60 on Feb. 7, for a 12% one-day loss.
Playstation 5 and Xbox Series X
Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) are releasing all-new, next generation video game consoles this fall. The Xbox Series X and Playstation 5 will rival high end gaming PCs for graphics processing power. Gamers are expected to snap them up.
Those launches are expected to kick off a frenzy of releases from video game companies. That in turn should translate into big gains. Companies like Electronic Arts (NASDAQ:EA) are expected to have a good year in 2020 as a result.
What about Take Two? The company’s various developers and studios will undoubtedly have some titles ready for the new console launches. But it’s unlikely that TTWO’s biggest franchises will have new titles there in time for the launch.
Red Dead Redemption 2 was just released in October 2018. And while Grand Theft Auto V is long in the tooth — it was released way back in 2013 — GTA VI seems unlikely to arrive in 2020. However, 2021 is a definite possibility, and by then there will be an installed base of new console owners desperate for next generation mayhem.
Bottom Line for TTWO Stock
Investment analysts like Take Two, despite the apparent lack of a tent pole release for the Playstation 5 or Xbox Series X in the fall. A new entry in Rockstar’s Grand Theft Auto series is undoubtedly coming eventually. It will mint money for TTWO when it does.
In the meantime, those Q3 earnings showed that Grand Theft Auto Online and Red Dead Online have plenty of life left. In addition, games like Outer Worlds are performing well — and that title has a highly anticipated Switch release coming this spring.
The 27 analysts polled by CNN Business have TTWO rated as a consensus “buy,” and with a median 12-month price target of $135, they feel the stock has 15.1% upside.
That may not be a blockbuster number, but it would represent solid growth on par with TTWO stock’s 2019 performance. And in the longer term, a growing install base of PS5 and Xbox Series X owners will be primed to plunk down their cash for Grand Theft Auto VI when it arrives.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
