Leading gaming company Take-Two Interactive (TTWO) is set to announce its fiscal 2020 first-quarter results on August 5. Analysts expect Take-Two’s revenue to rise 26.4% YoY (year-over-year) from $288.32 million, and its adjusted EPS to fall 83.0% YoY to $0.02 from $0.12.
How could TTWO do in the second quarter? Let’s see how it has performed in the last four quarters.
- In fiscal 2019’s fourth quarter, it beat analysts’ estimate of $0.75 by 4.0%.
- TTWO beat their estimate of $2.80 by 3.6% in the third quarter.
- In fiscal 2019’s second quarter, TTWO beat their estimate of $0.92 by 14.1%.
- TTWO beat their estimate of $0.06 by 100.0% in the first quarter.
Despite these earnings beats, TTWO stock has fallen marginally in the last year. It has been volatile since last October 2018, driven by weakness in the gaming industry and an overall market sell-off.
The stock fell from $139.91 in October 2018 to $84.41 in February. In April, the stock was trading at $90 per share when we identified it as undervalued. The stock has since gained an impressive 34.4%. It has returned 17.7% year-to-date, 200.0% in the last three years, and 430.0% in the last five years.
Strong gaming portfolio
Take-Two Interactive has focused on building a solid, loyal player base. Its three blockbuster titles, Grand Theft Auto, NBA 2K, and Red Dead Redemption, account for most of its revenue. Its latest Grand Theft Auto game was released back in 2013 and is still popular, with over 100 million units sold to date. Meanwhile, close to 25 million copies of Red Dead Redemption 2 have been sold since its launch last October. While TTWO’s monthly active user count is far lower than that of peers Activision Blizzard (ATVI) and Electronic Arts (EA), the company has focused on doing small things right, something ATVI is also looking to do.
The next Grand Theft Auto game is not expected until 2020 or even 2021. However, the next generation of gaming consoles such as PlayStation (SNE) and Xbox (MSFT) could be released earlier, boosting gaming sales as companies look to update gaming releases. The global games market is estimated to grow by a double-digit percentage this year, strengthening sales for TTWO and peers.
Is Take-Two Interactive stock overvalued?
Whereas TTWO stock has generated significant shareholder returns in the last five years, it has fallen since July 2018. Could the recent upward swing drive the stock higher in this year’s second half? A lot will depend on TTWO’s upcoming results and guidance.
Analysts expect TTWO’s revenue to fall 9.5% to $2.65 billion in 2020 as there are no major title releases scheduled. However, they expect the company’s revenue to return to growth in 2021 and its sales to climb 3.4% to $2.74 billion. They forecast revenue growth of 31.1% for TTWO in 2022, when the next Grand Theft Auto could be released.
While analysts expect TTWO’s earnings to fall 8.5% in 2020, they expect them to rise 9.0% in 2021 and grow 16.3% compounded annually over the next five years. Considering this forecast and the company’s forward PE multiple, we can see that the stock is overvalued.
TTWO stock could correct slightly in the short term, but remains a solid pick for fundamental investors. It is currently trading close to analysts’ 12-month average target price of $123.09.