Take-Two Interactive Software (TTWO, Financial) is a multimedia & graphics software company in the technology sector. The gaming company markets its products under the Rockstar Games and 2K labels, besides developing games and sequels under other names like Grand Theft Auto, Max Payne, Midnight Club, and Red Dead, etc.
The company posted fourth-quarter fiscal 2015 result last month, and the Street has been bullish on the company. The stock is currently trading around 6% below its 52-week high and having appreciated over 38% in last one year. Is the momentum sustainable? Let’s take a peek at the results and prospects.
Second-quarter numbers
During the second-quarter consolidated sales surged 83% year over year to $427.7 million, but lagged the Street’s expectations by $31.21 million. Geographically, international revenues accounted for 45% whereas U.S. accounted for the balance. Combined revenue of Grand Theft Auto and Borderlands series, constituting Catalog revenues, came in at $78.3 million.
On the other hand, digitally-delivered content sales grew 66% year over year to $202.5 million on the back of continued growth of the Grand Theft Auto, NBA 2K, Evolve, Borderlands and WWE 2K series, and a strong portfolio of digitally delivered offerings.
Recurrent consumer spending grew 47% year over year while accounting for 54% of total sales.
On the back of robust top-line growth, earnings per share came in at $0.49 versus $0.21 in the prior-year quarter and beat the consensus estimate by $0.22.
Take-Two exited the quarter with cash and cash equivalents of $911.1 million and long-term debt of $476.1 million, having generated $212.8 million cash flow from operations.
Growth drivers
In the $100 billion gaming industry, nothing gets bigger than Take-Two’s Grand Theft Auto. The fifth installment of the franchise roped in $1 billion in sales in its first three days of release in 2013. The company built upon this unprecedented success by releasing the title on PlayStation 4 and Xbox One in November 2014. It recently released the same title on PC and had a stellar run.
In addition to its blockbuster franchise, other four holiday releases performed better than expectations. NBA 2K notched highest rated sports title of 2014, across console and PC, based on average Metacritic score. Also, WWE 2K sold 40% more than the same period for WWE 2K in 2014.
Early next year, Battleborn is due for release, and this could be the next big title and fuel growth going forward.
Take-Two has also benefited from the better than expected performance of the new console cycle. According to an IDG estimate, the global installed base of new-generation consoles currently is over 34 million units and is expected to to reach 50 million units by the end of this year and 110 million units by 2019. This explosive growth of new consoles will be a key growth driver for the company.
Near-term outlook
The gaming company expects first-quarter fiscal 2016 earnings to be in the range of $0.25 to $0.35 per share on top of sales of $325 million to $350 million. For fiscal 2016, Take-Two expects sales to be in the range of $1.3 billion to $1.4 billion and earnings per share in the range of $0.75 to $1.0.
Analysts are bullish on the company. According to the 14 Wall Street Analysts, the mean price target is $33.94, with a high of $40 and a low of $26. Currently, the stock is trading at around $28 band, so the downside risk potential is far less than the upward swing.
However, the board has authorized the repurchase of 10 million shares, and this will provide stimulus to bottom-line growth.
Final take
Take-Two’s balance sheet is strong with $1.1 billion in cash versus $476.06 million debt. There will be share buyback activity too as the board has authorized repurchase of 10 million shares, and this will drive bottom-line growth.
The company is growing top- and bottom-line and with title refreshes and explosive growth of new consoles the momentum is all set to continue.
Hence, it would be the right time to add this stock to your portfolio.
