One of today's standouts was Take-Two Interactive Software, a services-prepackaged software company whose shares are up 5.45%, outperforming the Nasdaq by 4.78%. At $114.62, its shares are -11.73% below their average analyst target price of $129.86.
The average analyst rating for the stock is buy. TTWO may have outstripped the S&P 500 index by 4.84% today, but it has lagged behind the index by -22.99% over the last year, returning -32.43%.
Take-Two Interactive Software does not release its trailing 12 month P/E ratio since its earnings per share of $-2.33 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for TTWO of -49.2. Based on the company's positive earnings guidance of $5.23, the stock has a forward P/E ratio of . As of the first quarter of 2023, the average Price to Earnings (P/E) ratio of US technology companies is 27.16, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
Take-Two Interactive Software's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 0.333 Price to Earnings Growth (PEG) ratio. In TTWO's case, the elevated P/E ratio is justified by future earnings growth estimates -- assuming those estimates turn out to be close to reality.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on TTWO's margins:
| Date Reported | Revenue (k) | Cost of Revenue (k) | Gross Margin | YoY Growth |
|---|---|---|---|---|
| 2022-03-31 | $3,496,873 | $2,628,351 | 56.32% | 3.28% |
| 2021-03-31 | $3,369,915 | $2,402,722 | 54.53% | 8.76% |
| 2020-03-31 | $3,084,422 | $2,340,182 | 50.14% | 17.56% |
| 2019-03-31 | $2,683,820 | $2,215,199 | 42.65% | -14.51% |
| 2018-03-31 | $1,793,087 | $1,463,060 | 49.89% | n/a |
- Average gross margin: 50.71 %
- Average gross margin growth rate: 3.02 %
- Coefficient of variability (higher numbers indicating more instability): 10 %
We can see from the above that Take-Two Interactive Software business is not strong and its stock is likely not suitable for conservative investors.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Take-Two Interactive Software's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations (k) | Capital Expenditures (k) | Free Cash Flow (k) | YoY Growth |
|---|---|---|---|---|
| 2022-03-31 | $257,984 | $158,642 | $99,342 | -88.22% |
| 2021-03-31 | $912,318 | $68,923 | $843,395 | 33.39% |
| 2020-03-31 | $685,678 | $53,384 | $632,294 | -18.58% |
| 2019-03-31 | $843,515 | $66,969 | $776,546 | 91.27% |
| 2018-03-31 | $493,527 | $87,522 | $406,005 | n/a |
- Average free cash flow: $551,516,400.00
- Average free cash flow growth rate: 3.57 %
- Coefficient of variability (the lower the better): 55 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in TTWO have received an annualized dividend yield of 0.0% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Take-Two Interactive Software's P/B ratio is 1.865, indicating that the market value of the company exceeds its book value by a factor of more than1, but is still below the average P/B ratio of the Technology sector.
As of first quarter of 2023, Take-Two Interactive Software is likely fairly valued despite its negative P/E ratio, because it has a lower P/B ratio than its sector average, and positive cash flows. The stock has strong growth indicators because of its operating margins with a positive growth rate. We hope this analysis will inspire you to do your own research into TTWO's fundamental values -- especially their trends over time.
