After strong FY21, can Take-Two Interactive (TTWO) repeat the success this year?

For most people, online gaming platforms were a natural choice for spending their leisure time during the virus-induced lockdown. After a successful year, video game publisher Take-Two Interactive Software, Inc. (NASDAQ: TTWO) is expanding its development capabilities to tap emerging opportunities in the gaming market that is estimated to reach $285 billion in the next four years.

Grand Theft Auto Leads

To a large extent, the New York-based company owes the impressive growth to its blockbuster title Grand Theft Auto (GTA), the latest edition of which became a big hit during the pandemic. It is all set to roll out as many as 21 new games in the next twelve months, besides upgrading GTA-5 for the latest consoles, including Microsoft’s (NASDAQ: MSFT) Xbox and Sony’s Playstation.

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Read management/analysts’ comments on Take-Two’s Q4 earnings

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The stock, which peaked in early February after making steady gains throughout last year, pulled back since then amid concerns that the earnings guidance provided in the third-quarter report was not convincing enough to justify the high valuation. Currently, experts have a moderate buy rating on the stock, which is expected to grow in double-digits this year. Meanwhile, the management’s guidance for fiscal 2022 indicates a slowdown –projecting net bookings and earnings below the prior-year levels.

In Expansion Mode

Last year, the company strengthened its creative department by increasing headcount and acquiring studios, while continuing to invest in operations and infrastructure. The strategic priority is to provide innovative ways for players to stay engaged with the titles after their launch, thereby unlocking significant margin opportunities.

Providing new and innovative ways for audiences to stay engaged with our titles after their initial launch is a key strategic priority of our organization, and represents an important long-term growth and margin opportunity. Our record levels of recurrent consumer spending were largely driven by NBA 2K and Grand Theft Auto Online during the fourth quarter and were enhanced by the following offerings: Social Point’s live games, led by Dragon City and Monster Legends exceeded our expectations.

Strauss Zelnick, chief executive officer of Take-Two Interactive

Near-term Risks

Meanwhile, over-dependence on GTA could be a problem for the company in the long term because the game’s sales would flatten eventually. The management is not planning to launch GTA-6 anytime soon. Originally released about eight years ago, the game was upgraded earlier for the leading consoles. Also, user engagement is expected to moderate in the coming months as the market reopening gains steam, though the transformational shift to interactive entertainment would broaden the addressable market for the gaming industry.

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Can Activision extend the growth on strength of top franchises?

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In the near term, the remastered GTA-5 will be a key growth driver. Besides GTA, the company’s March quarter performance was positively influenced by the NBA 2K21 and Red Dead Redemption, the latest version of which was released in October last year. Profit beat estimates for the second consecutive quarter and fourth-quarter earnings jumped to $1.88 per share from $1.07 per share last year. Net booking, a measure of non-GAAP revenue, rose 20% annually to a record high of $3.6 billion.

At $171, Take-Two’s stock closed the last trading session broadly in line with its 52-week average. It has lost 13% so far this year and underperformed the market quite often.