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Will Take-Two Disappoint Investors on Monday?

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Take-Two Interactive (TTWO -0.18%) investors have a chance to level up next week. On Monday, the video game developer will announce earnings results for its fiscal 2023 first quarter that runs through late June.

There are some big concerns heading into that report, including the fact that people are losing excitement for digital entertainment following two years of pandemic-related demand spikes. But Take-Two might still find positive ways to surprise investors by showing solid engagement trends and projecting a busy second half of the year ahead for game launches.

Let’s take a closer look at the Q1 earnings announcement set for Monday, Aug. 8.

Sales updates are expected

There’s no denying that the wider video game industry is taking a step backward right now. In late July, Microsoft revealed a 7% slump in its gaming division, for example, as people spend less time — and money — within popular gaming franchises.

The big question heading into Monday’s report is how that trend might hurt Take-Two’s business. Net bookings, a key measure of consumer demand, rose 8% in the previous quarter due to strength in franchises like NBA 2K22 and Grand Theft Auto.

Look for reported sales to jump this quarter, mainly thanks to the addition of the Zynga franchises. Yet investors are also hoping for the non-Zynga business to post modest sales growth in Q1 and for the full fiscal 2023 year.

Investors are hoping to see higher margins

Take-Two’s digital sales are less exposed to inflation, and it is relatively easier for the company to boost prices on things like microtransactions. The company doesn’t rely much on digital advertising sales, either, giving it a leg up against rivals like Roblox. Still, investors are worried about increasing pressure on profitability ahead.

Operating profit margin has come down to around 14% of sales after peaking at just over 20% in earlier phases of the pandemic. Management back in May suggested that this slump will be temporary. “We believe that we can grow our margins meaningfully,” executives said in a conference call with Wall Street analysts. Shareholders will want to see evidence of that ability on Monday, at least through stabilizing operating margin.

Looking ahead

Take-Two has a busy two-year period planned, with two dozen major releases on tap, not including the recently acquired Zynga pipeline. That launch calendar is the foundation of management’s plan to significantly boost annual bookings while pushing profitability back toward 20% of sales.

We’ll find out on Monday whether executives are as bullish about the reception of the upcoming fiscal 2023 releases, including NBA 2K23 and GTA. If declining engagement softens that outlook, or if Take-Two has to delay one or two of those major titles, then investors might see weaker returns this year.

On the other hand, Take-Two is planning to roughly double the volume of major releases this year compared to fiscal 2022, targeting roughly 11% organic sales growth. If the company can achieve that goal, along with its target of much higher operating margin, then investors should enjoy excellent returns by simply holding this video game stock over the long-term.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Roblox Corporation, and Take-Two Interactive. The Motley Fool recommends the following options: long January 2023 $115 calls on Take-Two Interactive. The Motley Fool has a disclosure policy.

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