Streetwise for Friday, January 4, 2019

The preamble is always the same, the promotion of minimal risk and exalted returns; but for whom? Naivety by the average investor often leads to an unrestrained contagion of euphoria resulting in carnage of the gullible and a decimation of investment expectations.

Yet, the premise that quality companies will see enhanced shareholder valuations under the codicil of rising dividends and increased retained earnings remains valid. Consider Take-Two Interactive Software, a leading developer, publisher and marketer of interactive entertainment.

Take-Two’s share price has fallen more than 6 percent in 2018. Peers such as Electronic Arts (EA), Activision Blizzard (ATVI), and Zynga (ZNGA) have seen the same occurrence.

Will these companies stage a comeback in 2019? Take-Two’s sales are expected to rise more than 48 percent in fiscal 2019, while the global gaming market is set to experience robust reaching $166.0 billion by the end of 2022.

Though gaming companies have experienced short-term weakness, October was a record-breaking month for the industry, with games such as Call of Duty: Black Ops 4 and Red Dead Redemption 2 driving sales to record levels. According to the NPD Group, spending on games rose 73 percent year-over-year to $1.5 billion in October.

Gaming companies now boast robust product portfolios. Take-Two and its peers entered the digital and mobile gaming space a few years ago, driving their profitability higher. Take-Two entered the esports space in May with the launch of NBA 2K League, which features 17 teams.

Entertainment has become digital and gaming companies are achieving gross margins never possible in the 1990s as digital downloads and recurring revenues increase profitability. And although Take-Two does not pay a dividend, it still merits consideration.

Headquartered in New York City, Take-Two develops and publishes products principally through its wholly-owned labels Rockstar Games and 2K, as well as its Private Division label and Social Point, a leading developer of mobile games. 

The company’s products are designed for console systems and personal computers, including smartphones and tablets, and are delivered through physical retail, digital download, online platforms and cloud streaming services.

For its fiscal second quarter ended September 30, net revenue grew 11 percent to $492.7 million, as compared to $443.6 million for the same period a year prior. Recurrent consumer spending (virtual currency, add-on content and in-game purchases) grew 12 percent and accounted for 49 percent of total net revenue. 

The largest contributors to net revenue were NBA 2K19 and NBA 2K18, Grand Theft Auto Online and Grand Theft Auto V, NBA 2K Online 2, Dragon City and Monster Legends, and WWE SuperCard. 

Digitally-delivered net revenue grew 18 percent to $358.4 million, as compared to $302.9 million in last year’s fiscal second quarter and accounted for 73 percent of total net revenue. The largest contributors 

Net income increased to $25.4 million, or $0.22 per share, as compared to a net loss of $2.7 million, or $0.03 per diluted share, for the comparable period a year ago.

The company is raising its financial outlook for its fiscal year ending March 31, 2019, with net revenue is expected to range from $1.10 to $1.15 billion, resulting in net income of range from $36 to $48 million or $0.31 to $0.41 per share.

Note to Readers:

Save the Date: I will be teaching Advanced Investment Analysis, starting Monday, January 14, for the Ringling’s Osher Lifelong Learning Institute. Call 941-309-5111 for registration and information. About 14 seats left.

My 9th annual talk sponsored by the non-profit American Association of Individual Investors (AAII), titled: “Tactics for Tough Times – Deciphering Wall Street in 2019”, will be on Thursday, January 24, at the Hyatt Regency, 1000 Blvd. of the Arts. Registration/Social/Refreshments 3:30 P.M., Program 4:00 to 5:30, Q&A 5:30. Please call 941-706-3449 to register. $15 per person at the door.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.