NBA 2K Success And Mobile Weaknesses Will Define Future Performance

Key Takeaways

• Weak trends in mobile franchises and high expenses could negatively impact revenue and net margins.
  
• Development and marketing costs for new titles may suppress profit margins before realizing future profitability.
  
• Take-Two Interactive's strategic game releases and strong franchise performances support stable revenue growth and profitability, bolstered by mobile gaming and market expansion.

Catalysts

Develops, publishes, and markets interactive entertainment solutions for consumers worldwide.

• Despite strong performance from NBA 2K, a continuation of weak trends in some mobile franchises and a shift of operating expenses into future periods could negatively impact revenue and net margins in the upcoming quarters.
  
• The anticipated decline in Grand Theft Auto Online revenue, alongside ongoing issues in the hyper-casual mobile division and underperformance of certain games like Empires & Puzzles, could suppress net margins and earnings.
  
• Significant marketing and development expenditures, particularly for titles such as Match Factory! and other mobile experiences, may weigh down profit margins, even as the company aims to launch successful new titles.
  
• As development and marketing costs in the mobile business are currently expensed, the success of games like Match Factory! could temporarily impair financial results, affecting earnings and operating margins before realizing future profitability.
  
• While optimistic forecasts exist about future game releases, if market growth continues at a slower rate and titles fail to meet ambitious sales targets, particularly with high-profile games like Grand Theft Auto VI, this could lead to missed revenue projections and a reevaluation of future earnings potential.

Take-Two Interactive Software Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Take-Two Interactive Software compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Take-Two Interactive Software's revenue will grow by 10.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -67.1% today to 6.4% in 3 years time.
• The bearish analysts expect earnings to reach $468.0 million (and earnings per share of $2.56) by about April 2028, up from $-3.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 98.4x on those 2028 earnings, up from -10.4x today. This future PE is greater than the current PE for the US Entertainment industry at 22.0x.
• Analysts expect the number of shares outstanding to grow by 2.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Take-Two Interactive Software Future Earnings Per Share Growth

Risks

• Take-Two's strategic release schedule, including Grand Theft Auto VI, Borderlands 4, and other high-profile titles, indicates a strong pipeline that could positively impact their revenue and earnings in fiscal 2026 and 2027.
  
• NBA 2K's exceptional performance, with a 30% increase in recurrent consumer spending, suggests a robust revenue stream and potential for growth in profitability given its continued audience engagement.
  
• Increasing success in mobile games, such as Toon Blast and Match Factory!, supports growth in net bookings and recurrent consumer spending, positively affecting revenue.
  
• Strong partnerships and expansion into new markets, such as Zynga’s collaborations with entertainment brands, have the potential to enhance revenue streams and strengthen market positioning.
  
• The continued success of established franchises like Grand Theft Auto and Red Dead Redemption reinforces strong, stable revenue streams, contributing to steady earnings growth.

Valuation

• The assumed bearish price target for Take-Two Interactive Software is $188.1, which represents one standard deviation below the consensus price target of $216.93. This valuation is based on what can be assumed as the expectations of Take-Two Interactive Software's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $270.0, and the most bearish reporting a price target of just $135.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.3 billion, earnings will come to $468.0 million, and it would be trading on a PE ratio of 98.4x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $214.6, the bearish analyst price target of $188.1 is 14.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.