Will the Take-Two share price level up after Q3 earnings?

Analysts are forecasting a slowdown in earnings, and the Take-Two Interactive [TTWO] share price could be under pressure when it releases financial results for its third quarter ended on 31 December on 7 February.

Analysts polled by Zacks Equity Research forecast that the gaming group will post a 9.6% drop in earnings to $1.31 per share, though it also estimates a 7.56% rise in year-over-year revenues to $875.84m.

The publisher of the Grand Theft Auto series expects revenues between $840m and $890m and earnings between $0.85 and $0.95 per share for the quarter.

The slowdown in earnings is partly due to a recent string of acquisitions, including the purchase of games group Turia Games and video game developing company Roll7. More recently, Take-Two bought mobile games maker Zynga [ZNGA] for $12.7bn in January 2022, with the hope of further expanding its mobile and app offerings.

“This diversifies our business and establishes our leadership position in mobile, the fastest-growing segment of the interactive entertainment industry,” Strauss Zelnick, chairman and CEO of Take-Two, said. On the day it announced the deal the Take-Two share price plummeted, but the stock pulled back partly in the next trading session.

The acquisition built on Zelnick’s vow in its Q2 results release to “introduce new entertainment experiences that we believe have vast commercial potential and the ability to drive long-term engagement and recurrent consumer spending”.

Take-Two shares slumped after Zynga announcement

While the Zynga deal could open new doors for Take-Two, investors were uncertain about the price tag involved. As a result, the Take-Two share price plunged 13.1% after the announcement of the acquisition on Monday 10 January to close at $142.99, down from the close on Friday.

Although the TTWO share price recovered most of the loss by early February, Take-Two stocks were down 8.3% since the start of 2022 amid the wider tech selloff and fears of higher inflation and interest rates.

Gaming stocks have also faced headwinds as they are widely seen as ‘stay at home stocks’, which flourished in the pandemic but might struggle when societies and economies fully reopen. Reflecting this outlook, the Global X Video Games and Esports ETF [HERO], in which Take-Two has a 5.1% weighting, has seen its share price fall 7.4% since the start of the year.

However, Take-Two shares have been helped by Microsoft’s recent $68.7bn acquisition of fellow games maker Activision Blizzard [ATVI], which has sparked more investor interest in the sector.

Research firm Enders, as reported by Moneycontrol News, speculated that electronics giant Sony might be eyeing up EA as a potential acquisition, but if it chose to be more conservative it could look at Take-Two as a more affordable option. Sony made the headlines this week after it bought games maker Bungie for $3.6bn, but it may not be finished with M&As in the sector yet.

Take-Two beat expectations for revenue and net bookings in Q2

The gaming group generally performed well in the second quarter, reporting a 2% climb in revenues to $858.2m and a 3% rise in net bookings to $984.9m. Earnings per share came in at $0.09.

This compared with revenue expectations of between $740m and $790m and EPS of between $0.35 and $0.45. Net bookings were expected to range between $815m and $865m.

“Our results were outstanding,” said Zelnick, “We experienced consistently strong engagement trends across our key franchises, underscoring the durability of our offerings and the deep relationships that we have established with new, existing and returning players.”

“Our results were outstanding. We experienced consistently strong engagement trends across our key franchises” - Take-Two CEO Strauss Zelnick

Take-Two’s share price rose 4% after the announcement.

Analysts highlight strong consumer spending and success of new titles

According to CNN, analysts expect Take-Two to report earnings per share of $1.12 and revenues of $868m in the third quarter.

Analysts at Zacks point to steady video game spending in the quarter as a driver of the Take-Two performance, as well as excitement around newly released titles.

“This is anticipated to have been the largest contributor to net bookings in the to-be-reported quarter,” Zacks said. “The company is also expected to have benefited from growth in recurrent consumer spending — virtual currency, add-on content and in-game purchases.”

However, it warned that stiff competition from the likes of Activision Blizzard and Electronic Arts [EA] is expected to have hurt its market share.

If it reaches its forecast levels and can give encouraging forward guidance in terms of bookings and future releases, the Take-Two stock price could climb post-announcement.

Looking ahead, according to Market Screener, analysts have a consensus ‘buy’ rating and an average target price of $206 on the Take-Two stock.

Wedbush analyst Michael Pachter has an ‘outperform’ rating on the Take-Two stock. Wedbush sees significant Q3 upside from its popular NBA 2K series, and thinks there is “potential for full-year guidance to increase by $100m or more”, The Fly reported. Patcher also believes Take-Two is a potential M&A target.

If the gaming group can maintain momentum and see its recent acquisitions pay off, the Take-Two share price could be one to watch.