Here's Why Wall Street Discounts Take Two Interactive

Take-Two Interactive Software, Inc. TTWO reported robust 4Q16 results, although the company’s FY2017 guidance was below consensus.

BMO Capital’s Gerrick L. Johnson maintained an Outperform rating on the company, with a price target of $46.

Discounted Price Target

“This multiple is a discount to peers, which trade closer to 12x, thus offering further upside potential over the longer term as the company continues to gain scale, broader reach, and market share,” Johnson explained.

The analyst believes that the stock has 25 percent upside potential.

Conservative Guidance

Take-Two Interactive reported its non-GAAP EPS for the quarter at $0.46, beating the guidance, estimate and consensus.

However, the company initiated its FY17 EPS guidance at $1.00-$1.25, well below the consensus and the estimate.

“We believe TTWO’s solid 4Q performance, along with the company’s history of conservative guidance, and an expectation for a much stronger FY2018 extinguished concerns the market may have had regarding FY2017 EPS guidance being almost half of what the Street had previously expected,” Johnson mentioned.

FY17-FY18 Pipeline

According to the BMO Capital report, “The company put the kibosh on any new FY2017 title releases beyond what has already been announced, effectively killing the idea that there could be a Red Dead Redemption sequel in this fiscal year.”

However, Johnson pointed out that management comments regarding the FY2018 pipeline, along with the expected ramp in marketing expenses in FY2017 to support the new products for FY2018, suggests that a sequel to Take-Two Interactive’s popular title could be released in FY2018.