Video game developer and publisher Take-Two Interactive Software (NASDAQ: TTWO) stock got pummeled on its recent fiscal Q2 2023 earnings report. Losses were larger than expected with 70% attributed to the weakness in its mobile business and $50 million in FX headwinds as it collects 40% of net revenues overseas. This prompted the Company to lower expectations heading into a weak holiday shopping season as its CEO Strauss Zelnick unapologetically stated, “We call it like we see it…”. It’s important to note that Take-Two Interactive is comprised of many brand divisions each responsible for its slate of video game titles including Rockstar Games which handles the Grand Theft Auto series, Private Division, T2 Mobile Games, 2K which handles sports titles, and Zynga which is its acquired mobile subsidiary. It’s most popular brand is Rockstar Games who operates its most popular franchise in the Grand Theft Auto (GTA) series followed by its western-themed Red Dead Redemption series.
The GTA V Metaverse
Its GTA V title was published in 2013 but the Company has been able to milk it for over a decade as it powers its Grand Theft Auto online experience for consoles like Sony PlayStation 5 (NYSE: SNE) and Microsoft Xbox (NASDAQ: MSFT) and PCs powered by Advanced Micro Devices (NYSE: AMD) and NVIDIA (NASDAQ: NVDA) graphic processors. Rockstar has constructed an interactive metaverse of outlaws and criminals even before Meta Platforms (NASDAQ: META) coined the term metaverse. The Company successfully reached its 100-day integration milestone for Zynga. Take-Two has 87 game titles coming across mobile, PC, and console through fiscal 2025.
Take-Two suffered some surprise publicity as a hacker claimed to have accessed a Rockstar employee’s Slack (NYSE: CRM) account to attain videos of GTA VI which were leaked onto the internet. This sent shares lower initially, but the market was able to let it roll off. Many speculate it was an old development video from as far back as 2017. The Company acknowledged it was hacked, and it hadn’t impacted or hindered the development of GTA VI. Most importantly, none of the source code was stolen.
The World Waits for GTA VI
With the success of GTA V, the whole world waits with bated breath for any bits and pieces of news pertaining to the GTA VI release date. GTA V has sold over 165 million copies worldwide since 2013. It has been the most lucrative title in the series as Rockstar continues to provide a steady stream of patches, upgrades and DLC content to it GTA Online service. Microtransactions are executed using the purchase of Shark Cards and subscriptions for in-game currency. The Company has given no indication of a release date which gamers have speculated to be anywhere from 2023 to 2025. GTA VI is expected to be a metaverse of its own with multiple playable characters including a female lead character. The announcement of the launch date will rocket shares higher. It is the single most important catalyst for the Company.
The Pendulum Completely Swings from Green to Red
Take-Two shocked investors with its fiscal Q1 2023 report showing a surprise GAAP loss of (-$0.76) versus analyst expectations for a profit of $0.85, a (-$1.61) earnings miss. On Nov. 7, 2022, Take-Two released its fiscal second-quarter 2023 results for the quarter ending September 2022. This was the first full-quarter that includes Zynga’s financial performance since the completion of the $12.7 billion acquisition. The Company reported a GAAP earnings-per-share (EPS) loss of (-$1.54) missing analyst estimates for a loss of ($0.82). Revenues rose 52.3% year-over-year (YoY) to $1.5 billion beating $1.4 billion consensus analyst estimates. Net bookings rose 53% to $1.5 billion. Net cash provided by operating activities for the six-months ended September 30, 2022, was $155.4 million.
Is Capitulation in the Cards?
The TTWO weekly chart formed a breakdown on the head and shoulders (HS) breakdown through $173.30. Shares made a swing low at $98.65 triggering a weekly market structure low (MSL) breakout trigger on the bounce through $127.08. The weekly stochastic peaked just under the 80-band and slipped back down as the weekly exponential 50-period moving average (MA) led the downtrend resistance trading at $120.65 followed by the weekly 50-period MA falling at $137.72. A weekly inverse cup and handle (CH) triggered on the breakdown through the $106.54 “lip” support on heavy volume selling as a result of the weak fiscal Q2 2023 earnings report and lowered guidance. This also caused the weekly stochastic to cut its bounce short and reverse at the 40-band, thereby forming a divergence top on the short-lived bounce as a new swing low forms at $90.00. Pullback support levels to watch sit at $92.81, $90.00 post-earnings swing low, $84.41, and $80.54.
Bracing Investors for More Weakness
Take-Two CEO Strauss Zelnick commented, “We posted another consecutive quarter of solid results, with Net Bookings of $1.5 billion, underscoring our ability to launch exciting new games and content updates across our portfolio. We continue to make excellent progress with our integration of Zynga, and we remain highly optimistic about the vast, long-term growth potential for the mobile industry, which is expected to reach over $160 billion in gross bookings within the next four years.” He did lower forecasts due to the macroeconomic backdrop and FX fluctuations from a strong U.S. dollar. The Company expects fiscal Q3 net bookings to fall to $1.41 billion to $1.46 billion. It expects full-year bookings to come in between $5.4 billion and $5.5 billion, down from the previous forecast of $5.8 billion to $ 5.9 billion. Shares fell as low as (-12%) in the post-market upon the lowered outlook.
Analysts Remain Firm But Cut Price Targets
Analysts haven’t given up hope on Take-Two, but they have pulled in their price targets. Wedbush remained steadfast on its Outperform rating but cut its price target from $162 down to $140. Analyst Michael Pachter pointed out that its mobile gaming issues will continue to persist for another quarter or two with the wildcard of a new hit games could help beat its lowered top-line estimates. He adjusted his fiscal 2024 revenue expectations to $7 billion from $7.2 billion. Stifel analyst Drew Crum kept its Buy rating but lowered price target for Take-Two to $130 from $161 per share. Crum pointed out three transitory headwinds impacting Take-Two which are overall economic headwinds, privacy changes coming to games, and the re-opening of businesses after COVID. All these factor should alleviate over time. Bank of America (NYSE: BAC) upgraded shares of Take-Two to a Buy from Neutral but lowered its price target to $120 from $130.