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The Ratings Game: Take-Two stock sinks as analysts walk off mobile weakness, focus on pipeline

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Take-Two Interactive Software Inc. shares fell double-digits Tuesday after Wall Street absorbed a hefty outlook cut owing to the videogame publisher’s overestimate of the mobile market in the latter half of the year.

Take-Two
TTWO,
-15.67%

shares dropped as much as 17% Monday, and were last down 14%, compared with 1% gains on both the S&P 500 index
SPX,
-0.44%

and tech-heavy Nasdaq Composite Index
COMP,
-0.73%
.

Known for its “Grand Theft Auto” and “NBA 2K” titles, Take-Two reported late Monday weakness in its mobile segment, mostly acquired from its acquisition of Zynga, which closed in May, and unidentified pipeline “shifts” that, on the call with analysts, Chief Executive Strauss Zelnick had characterized as “modest.”

Execs also admitted earlier forecasts had relied too heavily on mobile performing better in the second half of the year.

Read: Videogame sales heading for decline in U.S., but one analyst sees a 2023 rebound

Cowen analyst Doug Creutz said he was puzzled as to the reduced outlook, which he called “frustrating,” not so much as to the outcome as to management’s thought process. Take-Two “meaningfully” lowered its outlook, Creutz said, which he said had been uncharacteristically aggressive.”

“It’s not clear to us why management would have assumed a significant improvement in performance (to a quarterly run-rate close to $700MM, it appears) for an asset that they had just acquired,” Creutz said. “We are inclined not to overreact given management’s historically reliable approach to guidance, though we remain puzzled at the thought process that led to the overly aspirational expectations.”

Morgan Stanley analyst Matthew Cost, with an overweight rating, said he sees thepipeline and longer-term opportunity as still intact.

“We believe Zynga will likely remain an overhang until investors become confident that mobile gaming has bottomed,” Cost said.

Jefferies analyst Andrew Uerkwitz, with a buy rating, compared waiting for Take-Two stock to turn around to “the tedious nature of side missions” in videogames.

“While it has been frustrating and management erodes investor trust with consecutive guide downs, we believe the risk/reward at these levels is compelling, and it’s a matter of when, not if, on the pipeline unlock,” Uerkwitz said.

Back in September, Take-Two had a scare when a hacker claimed to have source code and assets of “Grand Theft Auto VI,” and published them online. On the call, execs said they have found no evidence that any material data was taken.

Elsewhere in videogames, EU officials digging deeper into Microsoft Corp.’s
MSFT,
-0.73%

acquisition of Activision Blizzard Inc.
ATVI,
+0.94%
,
prompting Activision Chief Executive Bobby Kotick to dash off a statement, reminding investors that he had said from the outset “this is a long process.”

“This week the European Commission games industry announced that we have entered the second phase of our review in the region,” Kotick said. “We will continue to cooperate with the European Commission where, in the countries they represent, we have many employees.”

Of the 27 analysts that cover Take-Two, 22 have buy-grade ratings and five have hold ratings. Of those, 17 cut price targets resulting in an average of $141.50, down from a previous $163.42, according to FactSet data.

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