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The stock price of Take-Two Interactive (NASDAQ: TTWO) trades at $157 per share, about 26% below its peak level of over $213 seen in February 2021. In contrast, Electronic Arts stock (NYSE: EA) saw a 9% decline over this period. TTWO stock was trading at $123 in early June 2022, just before the Fed started increasing rates, and is now 28% above that level, compared to a substantial 45% gain for the S&P 500 during this period. Our detailed analysis of Take-Two Interactive’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

TTWO stock has seen a range of $130 to around $170 in the past 52 weeks, falling 1% year-to-date. This marks a significant underperformance vis-à-vis the broader S&P500 index, up 15%. This can partly be attributed to a delay in the release of its highly anticipated game – Grand Theft Auto (GTA) 6 – now expected in Fall 2025.

The decrease in TTWO stock has been far from consistent. Returns for the stock were -14% in 2021, -41% in 2022, and 55% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that TTWO underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the megacap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TTWO face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, TTWO stock appears to have some room for growth. The $174 average of analysts price estimate reflects over 10% upside from its current levels of $157.

2022 Inflation Shock
Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024 and 2025.

In contrast, here’s how TTWO stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Take-Two Interactive and S&P 500 Performance During 2007-08 Crisis

TTWO stock declined from $25 in August 2008 (the stock’s pre-crisis peak) to $6 in March 2009, as the markets bottomed out, implying it lost 75% of its pre-crisis value. It recovered to $10 in early 2010, reflecting a 62% rise between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Take-Two Interactive’s Fundamentals And Financial Position

Take-Two Interactive’s revenue has surged from $3.3 billion in fiscal 2021 (fiscal ends in March) to $5.3 billion in fiscal 2024. This can partly be attributed to its acquisition of Zynga in 2022, which has been seeing a steady rise in revenue, led by its popular mobile gaming franchises, including Toon Blast, Merge Dragons, and Empires & Puzzles. Take-Two Interactive’s own franchises, including Grand Theft Auto and NBA2K, have also been doing well. Take-Two Interactive reported a loss of $22.01 per share in fiscal 2024, compared to a profit of $5.09 per share in fiscal 2021. The 2024 reported results were impacted by a one-time goodwill impairment charge of $2.3 billion and $0.6 billion charge associated with acquisition-related intangible assets.

Take-Two Interactive’s total debt surged from $191 million in fiscal 2021 to $3.5 billion in fiscal 2024, while its cash decreased from $2.7 billion to $776 million over the same period. The company’s debt is around 12.7% of the company’s equity and its cash is around 6.4% of its assets, implying a good financial position.

Conclusion

The potential upside could be 36% if the stock recovers from $157 currently to its pre-shock levels of $213. With the Fed’s efforts to tame runaway inflation rates is helping market sentiments, we think TTWO stock can see levels of over $200 over time. However, based on the current fundamentals, with its stock already trading at 5x trailing revenues, versus 5.3x average over the last eight quarters, we think the upside is limited in the near-term.

[1] Returns as of 6/18/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.