Amid persistent inflation and high-interest rates, gaming company Take-Two Interactive Software, Inc (TTWO), which is known for popular titles such as Grand Theft Auto and NBA 2K, is struggling to stay afloat. The heightened recessionary fears could impact consumer spending on gaming products, putting pressure on TTWO’s business.

In this article, I have discussed why selling this video game stock is a good idea now.

U.S. consumer spending increased moderately in February, following the slowest pace in 2.5 years during the fourth quarter of 2022. While inflation is cooling, it remains way above the Fed’s 2% target, potentially leading to the Federal Reserve raising interest rates again this year.

Moreover, the possibility of a recession has increased this year, with many industry experts and CEOs warning of a potential slowdown in the U.S. economy. Economist Nouriel Roubini, who correctly predicted the 2008 financial crisis, has even suggested that more banks and financial institutions may go bankrupt, leading to a recession-like scenario in the United States.

A potential recession and high-interest rates could significantly affect the gaming industry. With consumer spending likely to decrease, people may be less likely to spend money on gaming products and services, leading to lower revenue for gaming companies.

Also, rising interest rates could make it more expensive for gaming companies to borrow money, potentially limiting their ability to invest in new games and technologies.

Due to the macroeconomic headwinds, TTWO lowered its fiscal year 2023 net bookings guidance to $5.20 to $5.25 billion. It expects its net loss to be around $721 to $704 million and net loss per share to range between $4.50 and $4.40.

In addition, analysts expect TTWO’s loss per share to rise 33.9% and 42.2% year-over-year to $3.57 and $0.68 in the fiscal year and quarter ended March 2023.

Shares of TTWO have slumped 14.3% over the past year to close the last trading session at $120.39.

Here are the factors that could influence TTWO’s performance in the upcoming months:

Disappointing Financials

During the fiscal 2023 third quarter that ended December 31, 2022, TTWO’s total operating expenses increased 122.9% from the year-ago value to $888.80 million. Its EBITDA declined 17.8% year-over-year to $147.80 million.

Also, TTWO’s net loss and net loss per share came in at $153.40 million and $0.91, compared to a net income and EPS of $144.60 million and $1.24 in the prior-year quarter, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, TTWO is currently trading at 33.86x, which is 122.8% higher than the 15.20x industry average. Its forward Price/Sales multiple of 3.88 is 219.3% higher than the industry average of 1.22. The stock’s forward EV/Sales of 4.33x is 139.1% higher than the 1.81x industry average.

Poor Profitability

TTWO’s trailing-12-month gross profit margin of 21% is 40% lower than the industry average of 34.99%. And its trailing-12-month negative EBIT margin of 1.61% compares with the industry average of 8.14%. Its trailing-12-month CAPEX/Sales of 3.37% is 7% lower than the industry average of 3.63%.

Additionally, the stock’s trailing 12-month ROCE, ROTC, and ROTA of negative 6.11%, 0.57%, and 2.39% compare to the industry averages of 2.94%, 3.54%, and 1.32%, respectively. TTWO’s trailing-12-month asset turnover ratio of 0.42x is 10.8% lower than the 047x industry average.

POWR Ratings Reflect Bleak Prospects

TTWO’s overall D rating translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TTWO has a D grade for Growth, consistent with its poor performance in the last quarter.

Also, the stock has a D grade for Quality, in sync with its poor profitability metrics.

The stock is ranked #20 out of 21 in the D-rated Entertainment – Toys & Video Games industry.

Beyond what I have stated above, we have also given TTWO grades for Momentum, Value, Stability, and Sentiment. Get all TTWO ratings here.

Bottom Line

The gaming industry faces significant challenges amidst the global economic landscape. Rising inflation and increased borrowing rates by central banks have created headwinds for the industry. Moreover, delays in game and title releases are adding to the woes.

TTWO faced market challenges in the previous quarter due to declining consumer spending and reduced fiscal year 2023 net bookings guidance.

Considering the challenging market conditions and the company’s poor fundamentals, it could be wise to avoid this stock now.

Stocks to Consider Instead of GameStop Corp. (TTWO)

The odds of TTWO outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Entertainment – Toys & Video Games industry instead:

SciPlay Corporation (SCPL)

Playtika Holding Corp. (PLTK)

Nexters Global Limited (GDEV)

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TTWO shares fell $0.89 (-0.74%) in premarket trading Wednesday. Year-to-date, TTWO has gained 14.76%, versus a 8.23% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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