At the beginning of this month, we asked if Activision Blizzard, Inc. (NASDAQ:ATVI) was about to hit a wall. Shares were up almost 50% on the year and were certainly overbought. ATVI stock is up slightly since then after reporting solid earnings. The question now shifts to Take Two Interactive Software Inc (NASDAQ:TTWO), which is up 39% in 2017. Will TTWO stock have a similar reaction when it reports on Tuesday before the open?

Take-Two Interactive is well-known for video game series like BioShock, NHL 2K, WWE 2K and Borderlands.

Gamers no longer need a physical disc to play the game. They can download video games right to their consoles. Direct to consumer sales make it that much easier to purchase games. No more waiting, no more broken discs.

Convenience is never bad for sales.

Perhaps more importantly, companies like Take-Two Interactive are thriving from in-game purchases. Game developers have made it incredibly easy to spend $2 to $10 on in-game purchases. These purchases can be for customization effects or to unlock certain attributes or levels.

This not only boosts sales, but increases profitability as these sales have very good margins. It’s almost like the razor-razor blade model — only the razor costs $60 in most cases. While not everyone partakes in in-game purchases, many do and it’s great for game makers’ bottom line.

Looking Ahead at Take-Two Interactive

TTWO stock has been on fire, climbing over 88% in the past year. Growing sales 30% in fiscal 2016 certainly helps. While net income was slightly negative last year, it was a vast improvement from the $280 million loss in 2015.

For fiscal 2017, analysts expect earnings-per-share of $1.98, just a 1% improvement year-over-year. However, earnings expectations of $2.81 in 2018 represents 42% growth. Analysts expect sales to grow 18.8% this year and 20.7% next year.

For Take-Two Interactive though, the company could exceed, as it has a history of handedly topping analysts’ expectations. Additionally, Take-Two’s $250 million acquisition of Social Point could help boost sales and better position the company in the mobile-gaming arena.

Further coverage of competitive video gaming — eSports — puts even more attention on gaming. That should help drive consumers to top titles as well. This arena garnering more coverage certainly shouldn’t be viewed as a negative, as it’s like free press for video games and TTWO.

Trading TTWO Stock

 

Prior to Take-Two selling off a few days ago, the stock had been overbought for a month. This was determined by the above-70 reading on its relative strength index (orange circle).

A look below at its MACD (purple circle) shows that the momentum may have peaked. That said, TTWO stock appears to be consolidating near the $67.50-level.

So how do we trade it? Take-Two trades at 24x forward earnings estimates. That’s not cheap, but it’s also not that expensive given expectations for 40% growth. On a trailing sales basis, the stock trades at 4.4x times revenue, which is far below ATVI and Electronic Arts Inc. (NASDAQ:EA). On a forward basis, TTWO stock is even cheaper compared to its peers.

Surprisingly, its market cap is vastly smaller than that of AVTI or EA as well. Take-Two Interactive sports a market cap of just $6.75 billion. Could this make the company an M&A target? Perhaps, although an acquisition would be nothing but speculation at this point.

The bottom line with Take-Two is simple: Investors are bidding up the stock as management continues to grow the business. However, initiating a new position isn’t the right fit for me, personally. Up almost 40% on the year, it seems as if the train has left the station. For those that have been long, holding seems prudent.

Perhaps it will rally on Tuesday, as TTWO stock has worked off its overbought condition. But a pullback to between $62 and $65 could make for a more attractive entry point.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.