Take-Two Interactive's (TTWO) results give us a great look at not only the future of the gaming industry but also a part of it that may soon fade into memory. After Monday's closing bell the company announced results that absolutely destroyed expectations. TTWO pulled in earnings per share of $0.41 on revenue of $540.5 million in revenue, a 39% year-over-year increase. Wall Street expected a decline in revenue to $363.79 million with a scant two penny profit.
Moving forward, management predicts Q2 earnings of $1.04 to $1.14 per share on revenue in the range of $855 million to $905 million. Additionally, fiscal year 2020 results should be earnings of $3.71 to $3.96 per share on revenue between $2.83 billion to $2.93 billion. Back in May, the company projected its Fiscal Year 2020 results to include earnings of $3.39 to $3.65 per share on revenue of $2.7 billion to $2.8 billion, so yesterday's report and guidance pumped optimism into TTWO's shares.
Two metrics stuck out to me and I believe you'll find the commonality of it more and more as we review titles. The company is riding the wave of several franchises and the releases under those including NBA 2k19, Borderlands, Red Dead Redemption 2, Red Dead Online, GTA V, and GTA Online. What jumps out at me is those last two titles adding the word "online." These are huge franchises, especially GTA and its nine-figure until sale franchise. The more online is significant. Digitally delivered revenue increased 36% to $427.8 million while recurrent consumer spending increased 31% to $313.5 million. These are the numbers that should garner investor interest.
The move to digital delivery is fantastic for margins. What it's not good for is retailers, retailers like GameStop (GME) . With the advent of cloud gaming, and the potential for gaming without the use of an expensive console, a move online is key. If TTWO can begin to establish franchises like GTA, Red Dead Redemption, and eventually Borderlands into this model and have the gaming community enthusiastically accept it. The company should be able to ride this momentum for a multi-year cycle. Once we include the booming popularity of ESports, Take-Two should see secondary gains as ESports expand gaming competitions well beyond the small circle of popular games and Battle Royale style combat.
It can be difficult to chase a stock pushing higher by 9%, but Take-Two has a history of continuing its first day post-earnings move over the next three weeks. Over the past four years, which encompasses 16 earnings report, the stock has continued in the same direction of the first day close 13 times. A couple of the non-continuation moves were basically flat.
One way to play this would be a call spread that expires in 24 days on August 30th.
The Trade:
Buy to open August 30 $125 - $130 call spread at $2.50
Net Cost $250
Max Risk $250
Max Reward $250
Breakeven $127.50
Days until expiration: 24
Intrinsic value $90
This sets out a risk versus reward of roughly 1 to 1 with time fairly neutral over the next week although it will have to be watched closer to expiration. Given its history, I would say odds of a move higher outweigh lower by 3 to 1, but the overall market is suspect. Still, the odds of a move higher outweigh the odds of a move lower, so the trade off feels logical.
One other consideration for traders is using an ESports ETF like the Roundhill BITKRAFT ESports & Digital Entertainment ETF (NERD) . The current weighting of TTWO was 4.43% as of August 5th, so the stock will have some influence on performance, but the risk is fairly balanced across the top 10 holdings.
