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Take-Two Interactive Braces For a Tough Quarter


Image source: Getty Images.

The video game industry has enjoyed huge growth over the years, and Take-Two Interactive (NASDAQ: TTWO) has made sure to remain squarely in the mix to capitalize on key profit-making opportunities. The Grand Theft Auto franchise has been one of the main contributors to Take-Two's long-term success, but a host of other games also contributes to its bottom line. Yet as the company begins a new fiscal year, Take-Two investors come into the game maker's first-quarter financial report on Aug. 4 expecting huge declines in revenue and a net loss. Let's take an early look at Take-Two Interactive to figure out whether things will really be as bad as investors fear.

Stats on Take-Two Interactive

Expected EPS Growth

(197%)

Expected Revenue Growth

(30%)

Forward Earnings Multiple

17.3

Expected 5-Year Annualized Growth Rate

12.2%

Data source: Yahoo! Finance.

How bad will things get for Take-Two?

In recent months, investors have lost a lot of confidence in their projections for Take-Two's earnings. They've reversed initial calls for a profit of about $0.20 per share and now expect a $0.30 per-share loss for the fiscal first quarter. They've also cut their full-year fiscal 2017 projections by more than 35%. Some of those earnings should come back the following year, and investors seem to be counting on that happening, given the fact that the stock is up 8% since mid-April.

Take-Two's fiscal fourth-quarter results set the gloomy mood for the company's fundamentals this quarter. Revenue fell 20%, and adjusted net income edged downward by 5% from year-ago levels. Yet both numbers were better than most investors had expected from Take-Two, and the company tried to accentuate the positives in the future by pointing to new releases in popular game franchises like Battleborn and Mafia III. Nevertheless, the big ramp-down in guidance to expect net losses and big revenue declines didn't exactly carry a lot of positive momentum into the new fiscal year.

What's ahead for Take-Two Interactive?

Still, Take-Two has a lot of projects in its pipeline that could spur growth. One interesting opportunity came out of the Games for Change Festival in June, at which Take-Two said that it would work with nonprofit learning company GlassLab to modify a version of the Sid Meier's Civilization V game and make it available to high schools beginning in the fall of 2017. Dubbed CivilizationEDU, the game will allow students to create historical events, make decisions and evaluate their impact, and look at the interactions among military, political, socioeconomic, and technological issues. The project latches on to a broader movement toward interactive entertainment as a learning tool, and even Sid Meier himself has noted that learning while playing is a key element of what makes his Civilization series fun.

Interestingly, though, Take-Two seems less excited about a key trend that other companies appear to be focusing on very closely. CEO Strauss Zelnick has taken a skeptical view toward the rise in interest in virtual reality, noting that the technology is expensive and requires users to dedicate an open space in their homes toward play. Zelnick has a long history of expressing downbeat opinions about virtual reality, and although he acknowledges that the trend presents an opportunity, he thinks it could take longer to play out than many of his peers in the video game industry currently expect.

Some investors believe that Take-Two should look at strategic combinations as a way to grow. One name that many have mentioned is France's Ubisoft, which has received attention from Vivendi and could be looking for an alternative. However, Ubisoft and Take-Two have been mentioned as possible merger partners for nearly a decade, and nothing has come of those rumors thus far.

In the Take-Two earnings report, investors need to hear convincing plans about how the company will break out of its slump and start to grow its revenue and earnings again. Shareholders love Grand Theft Auto, but poor results in between releases of the hit game isn't something they'll put up with forever.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Take-Two Interactive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.