Trading at a discount to estimates
The average 12-month price target for Take-Two Interactive (TTWO) is $122.20, which is 30% below its current target price. Around 80% of analysts are optimistic about Take-Two stock and recommend a “buy.” The company has a forward 2019 PE ratio of 28.9x, so the stock seems undervalued when compared with its robust revenue and growth rate.
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Strong gaming portfolio
Take-Two has a strong gaming portfolio and will bank on Red Dead Redemption 2 and NBA 2K19 to drive sales in 2019 and beyond. These two games are among the top five gaming titles sold in the United States last year.
Important metrics for TTWO
Digital net bookings rose 85% to $704 million in the fiscal third quarter of 2019 for Take-Two. The company’s balance sheet is strong with over $1.5 billion in cash. Operating cash flow stood at $587 million and rose close to 200% in Q3. The company repurchased 1 million shares worth $109 million, suggesting that the management expects the stock price to increase.
However, investors were not impressed by Take-Two’s rising operating costs. Operating expenses rose 46% to $299 million in the third quarter. Sales and marketing expenses more than doubled from $79.5 million to $161.3 million, which is understandable as the company had to advertise as it launched Red Dead Redemption 2. The marketing efforts helped the game achieve strong sales in the first three months. The company is also banking on online sales to drive revenue growth over the next few quarters. As the above table shows, Take-Two’s digital sales have risen from $700 million in fiscal 2016 to $1.13 billion in 2018.
There are threats from popular games such as Fortnite and PUBG. However, given that the stock is trading 33% below its 52-week high, it looks like the threats from slowing revenue in 2020 and free-to-play games have been priced into the stock.
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