As is often the case, the summer months are not shaping up too well for the broader video game sector.
Overall industry sales dropped 26% to $652.2 million in June, according to research firm NPD Group. The misery was fairly evenly split -- software sales fell 20% from a year ago while hardware sales plunged 42%. Yet, in the face of such horrid numbers, shares of Take-Two Interactive (TTWO) have remained buoyant.
I think the market continues to cling to the hope of Take-Two releasing Grand Theft Auto 6 before this holiday season. Further, the market remains very bullish on Grand Theft Auto 5 -- which has seemingly been on the market forever -- continuing to perform well due to frequent new content drops.
But there are several risks headed into the company's fiscal-first-quarter results on Thursday that the market may be overlooking. In other words, the risk/reward looks unfavorable right now, and it has little to do with the NPD data that are often panned by industry execs for not including fast-growing digital sales.
Risks on Take-Two
Pokemon Go Effect: Nintendo (NTDOY) has moved over the past week to squash the bubble in its stock price created by Pokemon Go mania. While investors have subsequently cooled on Nintendo, it doesn't diminish the impact of Pokemon Go on the gaming industry. In particular for Take-Two, it has been overearning on the back of recurring revenue from Grand Theft Auto 5. With Pokemon Go catching fire, and potentially stealing some gamers from the GTA universe, I wouldn't be surprised if Take-Two takes a cautious stance on current quarter guidance, especially as it moves quickly to fine-tune upcoming launches such as Mafia 3 and WWE2K17. The conference call for Take-Two this time around will take on greater importance as a way to parse out any current quarter trends.
Overwatch Impact: The shooting game Overwatch has been an unexpected juggernaut for the game publisher Activision Blizzard (ATVI) . It was easily the top-selling PC and console title in June (was a solid No. 3 in May), NPD pointed out. While Activision Blizzard is likely sitting on a better-than-expected quarter as a result, it's unlikely Take-Two will come away from the Overwatch juggernaut unscathed. I suspect the title's success ate into Grand Theft Autos 5's fan base, while causing a very poor Medacritic rating (key review site) of 69 for a somewhat comparable game from TTWO in Battleborn.
In the end, this analysis brings up a long-running debate on Take-Two -- it's just not diversified enough. I am really not impressed with its release slate for the balance of the year, and feel new introductions could get lost in the crowded gaming space, especially if Pokemon Go garners enhanced features.
Grand Theft Auto 6: The company has been quite mum on this front. In fact, we don't even know if the title is in development (it "likely" is)! Take-Two's communications head felt it necessary to yell at me on the phone following a recent interview with its CEO in which the headline suggested GTA 6 was on the way (no comment on how I responded to this phone call...). Can you blame the company for being as sensitive as a newborn baby is to loud noise and light? If the company hints GTA 6 is coming, the people obsessed with GTA 5 will stop spending on the game and save their pennies to buy more gear in the upcoming new title. Poof, there goes investors for the exit doors, at least in the near term.
Whatever the case, I do not get the sense Take-Two will signal to Wall Street later this week GTA 6 is nearing release. The market gave the company a free pass on this one last time around, but will not likely do so now given sluggish industry sales and rivals gaining attention for their new titles.