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Is Take-Two Interactive Stock a Buy Now?

Is Take-Two Interactive Stock a Buy Now?
Written by publishing team

Take-Two Interactive. interactive‘s (NASDAQ: TTWO) The stock price fell 13% on Monday after news of the company’s purchase Zynga (NASDAQ: ZNGA) In a deal worth $12.7 billion. The stock is now down about 24.5% over the past 12 months and has suffered similar price losses to the competition for a long time Activision Blizzard (NASDAQ: ATVI) (27%) during the same time frame.

However, buying Zynga brings with it innovative mobile and casual games as well as compelling perks. The question for investors is whether the lower price and the expanded assortment can revive the video game stock?

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How Zynga Can Boost Take-Two’s Business

Take-Two owns popular game franchises including Grand Theft AutoAnd NBA 2K, And Red Death. However, it has long directed its games for console and PC use. Although it created T2 Mobile Games, it lags behind in mobile which has benefited from Activision Blizzard and electronic arts (NASDAQ: EA). In recent years, it has also had to compete with companies like Tencent and the sea ​​ltd Games department, Garena.

By acquiring Zynga, it is following in the footsteps of its old US-based competitors by entering the mobile gaming market through acquisition. Activision Blizzard acquired King Digital in 2016, while EA bought Glu Mobile last year.

Zynga will merge with T2 Mobile Games, remaining a separate division of Take-Two, and Frank Gibo, CEO of Zynga, will continue to lead that division under the Zynga name. Thus, Take-Two can now become a force in the mobile world as the owner of Zynga Poker And words with friends.

By purchasing Zynga, Take-Two can establish itself as a leader in hyper casual games (free, easy-to-play mobile games with minimal user interfaces) since Zynga bought Rollic Games in 2020. Additionally, since Zynga Chartboost, Take-Two can connect marketers to the gaming audience more effectively once the deal is closed.

Financial boost

Take-Two’s financials have suffered in recent quarters. Revenues of $858 million for the second quarter of fiscal year 2022, which ended September 30, were up 2% compared to the same quarter in fiscal 2021. Conversely, net income fell 83% to $20 million, as operating expenses rose 30% as higher marketing costs, headcount, information technology and merger expenses (from its previous purchase of Nordeus) affect the bottom line.

Zynga reported revenue of approximately $705 million in the third quarter of 2021, its most recent quarter. This represents a 40% year-over-year increase. It also lost $42 million in the third quarter, but that is an improvement from a loss of $122 million in the quarter last year as the company slowed operating expense growth.

Zynga has come close to matching Take-Two in terms of revenue. Hence, if this pattern continues, the merging company may soon experience double-digit income growth due to the merger. It can also boost profitability over time as revenue growth has helped reduce losses for Zynga.

Admittedly, the valuation presents a mixed picture for Take-Two stock. The company’s lower earnings boosted its P/E ratio, and its earnings multiple of 30 came in well above Activision’s P/E ratio of 19. However, Take-Two’s P/S ratio of 4.9 comes in slightly below Activision is at 5.5 and EA is at 5.8, which makes Take-Two more comparable in rating to its closest peers.

Should you consider Take-Two?

Take-Two’s purchase of Zynga could turn out to be one of the best buys of 2022, but it may take time to pay off for casual investors. Zynga’s losses will reduce profitability initially, and the merger costs will likely keep Take-Two’s operating costs higher for some time.

However, Zynga’s new Take-Two division should immediately boost revenue growth and close the competitive gap between it and its major competitors. With a low P/S ratio and shares selling at a huge discount from their highs, investors can profit in the long run.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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