Yesterday, Take-Two Interactive Software (TTWO) unveiled its earnings report, in which the company reported better-than-expected revenue in the fourth quarter but posted broad losses. Let’s delve into its fundamentals to determine whether you should buy or sell this stock. Read more…

Take-Two Interactive Software, Inc. (TTWO) reported its fourth-quarter and full-year results yesterday, May 16. The company failed to beat the consensus EPS estimate, but its revenue came above Wall Street estimates. In this piece, I have discussed why it could be wise to ditch the stock now.

For the fourth quarter, analysts expected an EPS of $0.08, but TTWO reported a loss per share of $0.59. On the other hand, its revenue came 2.2% above Wall Street estimates. The video game publisher’s total net bookings decreased 3.2% year-over-year to $1.35 billion. However, this figure surpassed analysts’ estimates of $1.30 billion, driven by resilient in-game spending on live service titles like “Grand Theft Auto V” and “WWE 2K24.”

TTWO now forecasts bookings between $5.55 billion and $5.65 billion for 2025, a revision from its prior forecast of just over $7 billion. Take-Two CEO Strauss Zelnick said, “We believe that our company is poised to achieve new levels of success, and we expect to deliver sequential growth in net bookings for fiscal 2025, 2026, and 2027”.

However, as part of a broader cost-reduction strategy, the company recently cut approximately 5% of its workforce and halted several projects in development, mirroring similar cost-saving initiatives across the gaming industry. TTWO believes that this move is expected to drive more than $165 million of annual cost savings.

Looking ahead, the company expects its first-quarter total net revenue to come in between $1.30 billion and $1.35 billion. Its operating expenses are expected to be between $928 million and $938 million. In addition, its EBITDA (on a non-GAAP basis) is forecasted to fall in the range of $26 million to $47 million.

Shares of TTWO have plunged 3.8% over the past three months and 8.2% year-to-date to close the last trading session at $146.08. Also, the stock has declined 4.6% over the past six months.

Now, let’s discuss several other factors that could influence TTWO’s performance in the upcoming months:

Deteriorating Financials 

For the fourth quarter that ended March 31, 2024, TTWO reported total revenue of $1.40 billion, compared to $1.45 billion in the same period of 2023. Its advertising revenues decreased 22.8% from the year-ago value to $138.80 million. Its total operating expenses surged 243.8% year-over-year to $3.18 billion, driven mainly by goodwill impairment and reorganization expenses.

The company’s loss from operations came in at $2.71 billion, widening 286.3% from the previous-year quarter’s loss of $702.40 million. Furthermore, TTWO posted a net loss of $2.90 billion, or $17.02 per share, which increased considerably by more than 370% compared to the year-ago loss of $610.30 million, or $3.62 per share, respectively.

TTWO reported an EBITDA loss of $19.60 million versus an EBITDA of $87 million in the prior-year period. Also, its cash and cash equivalents reduced to $754 million as of March 31, 2024, compared to $827.40 million in 2023.

Mixed Analyst Estimates

Analysts expect TTWO’s EPS to decrease 2.8% year-over-year to $0.29 for the first quarter ending June 2024. Likewise, it is expected to decline further by 16.3% in the next quarter (ending September 2024). However, its revenue for the current quarter is expected to increase 4.7% year-over-year to $1.26 billion.

For the fiscal year ending March 2025, TTWO’s revenue is expected to increase 5.7% year-over-year to $5.64 billion. The company is estimated to post an earnings per share of $4.10 in the current year, indicating a 45.95% improvement from the prior year period.

Premium Valuation

In terms of forward non-GAAP P/E, TTWO is currently trading at 24.32x, 74.2% higher than the industry average of 13.96x. Similarly, its forward Price/Sales multiple of 3.56 is 186.4% above the industry average of 1.24. In addition, the stock’s forward EV/Sales and EV/EBITDA of 3.95x and 18.49x are 112.5% and 139.9% higher than the industry averages of 1.86x and 7.70x, respectively.

Dimmed Profitability

MRNA’s trailing-12-month net income margin of negative 26.90% is lower than the industry average of 3.01%. Likewise, its trailing-12-month ROCE and ROTA of negative 16.08% and negative 9.74% compares to the industry averages of 3.44% and 1.24%, respectively. In addition, the stock’s 0.34x trailing-12-month asset turnover ratio is 30.5% lower than the 0.49x industry average.

POWR Ratings Reflect A Weak Outlook

TTWO’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TTWO has a D grade for Growth and Sentiment, consistent with its poor financial performance in the last reported quarter and unfavorable analyst estimates.

Within the D-rated Entertainment - Toys & Video Games industry, TTWO is ranked #16 out of 18 stocks.

Beyond what I have stated above, we have also given TTWO grades for Growth, Value, Momentum, and Stability. Get all TTWO’s ratings here.

Bottom Line

Despite a gradual recovery post-pandemic, the video game industry is facing a sharp slowdown this year, with diminished consumer spending leading to widespread layoffs and operational cutbacks across firms. Take-Two’s cut has come on the heels of a slew of layoffs throughout the gaming industry, including reductions at Sony’s PlayStation, EA, Microsoft Gaming, Riot Games, and Epic Games.

As gamers record fewer hours of playtime, this downturn aligns with forecasts indicating subdued growth in PC and console gaming revenue, expected to hover below pre-pandemic levels through 2026. Analysts project a subdued 2.7% growth from the end of 2023 to 2026, well below the 7.2% growth rate seen from 2015 to 2021. Adding to these challenges is a decline in the average quarterly playtime among gamers, dropping by 26% from 2021 to 2023.

Given this backdrop, the company’s guidance for future periods remains a concern, reflecting the unpredictable nature of game release schedules and market conditions. Thus, considering the weak financials, declining profitability, and bleak near-term prospects, it could be wise to avoid investing in TTWO now.

Stocks to Consider Instead of Take-Two Interactive Software, Inc. (TTWO)

Given its uncertain short-term prospects, the odds of TTWO outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) and B-rated (Buy) stocks from the Entertainment - Toys & Video Games industry instead: DoubleDown Interactive Co., Ltd. (DDI), Playtika Holding Corp. (PLTK), and Mattel, Inc. (MAT).

To explore more A and B-rated Entertainment - Toys & Video Games stocks, click here.

What To Do Next?

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TTWO shares were trading at $147.54 per share on Friday afternoon, up $1.46 (+1.00%). Year-to-date, TTWO has declined -8.33%, versus a 11.61% rise in the benchmark S&P 500 index during the same period.

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About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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