This Video Game Company May Be Surging After Earnings, But A Top Analyst Warns Not To Buy The Hype

Aside from being an obsession for many, the video game business has blossomed into a multi-billion dollar industry that many are eager to join.

Despite the hype, top analyst Colin Sebastian of Robert W. Baird urges investors to stay on the sidelines of Take-Two Interactive Software, Inc. TTWO, the video game company best-known for its Grand Theft Auto franchise, even after the company posted strong earnings. Colin Sebastian has a 61 percent success rate recommending stocks with a 13.8 one-year average return per rating. He is one of many top analysts ranked by TipRanks.

The analyst highlights three main aspects of the company’s earnings, leading him to remain neutral on the stock:

1. Overall numbers:

“Take-Two reported solid F3Q16 results”

The company posted non-GAAP revenues of $486.8 million and EPS of $0.89. Both of these figures were above the analyst’s consensus of $446 million and $0.50, respectively. Sebastian attributes the beat to strong sales of Grand Theft Auto V, which sold more than 60 million units, and NBA 2K16, which sold more than 6 million units. The analyst says the significant EPS beat is thanks to lower R&D expenses and a tax benefit.

2. Digital highlights:

“While digital revenue decreased 1.7% Y/Y to $214 million, recurrent spending grew 45% Y/Y.” On the earnings call, TTWO management indicated that Grand Theft Auto’s online segment will continue to grow. The analyst points to the long-term stream of Take-Two’s recurring revenue as the company adds more games to its arsenal and gains a loyal following. Additionally, some of the company’s games, specifically NBA 2K16, are starting to get a foothold in Asian markets.

3. 2016 guidance:

“Management raised the F2016 revenues and EPS outlook to midpoints of $1.51 billion and $1.70 (vs. $1.38 billion and $1.08 previously)”

Sebastian attributes the increase in guidance to the outperformance in the past quarter and the perceived continued success of Grand Theft Auto V and NBA 2K16. The analyst points to the new release of XCOM 2, and to the pending release of Battleborn, the company’s next big title. Despite the company’s promising report, Sebastian is remains neutral on the stock with a $38 price target. He ultimately believes that the company only has near-term product momentum and urges investors to stay on the sidelines despite the anticipated uptick in share prices after earnings.