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$725 Million In Sales In Just 3 Days Puts This Small Gaming Company On Track To Challenge Gaming Industry Heavyweights

$725 Million In Sales In Just 3 Days Puts This Small Gaming Company On Track To Challenge Gaming Industry Heavyweights

And its stock is ripe for the picking. Here’s what you need to know about this gaming stock.

Video game stocks have seen explosive growth over the last five years, with big names like Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: EA) up more than 600% at their peaks reached this year.

While these stocks have taken a tumble recently, there’s no denying the video game sector is a phenomenon and one investors should consider.

One reason these stocks have skyrocketed is that they’ve seen explosive profitability coming from growing sales. But the reason these stocks will continue higher over the long term is that the number of gamers is growing.

According to a survey by Nielsen Holdings, in 2018, 66% of the U.S. population over the age of 12 identified themselves as gamers – that’s up from 58% just five years ago.

As new gaming platforms and popular games have hit the market, interest in gaming has grown rapidly with games like Activision’s Overwatch and Epic Games’—which Chinese tech giant Tencent (OTC: TCEHY) has a stake in—Fortnite so popular, they’re now household names.

The explosive popularity of games like Fortnite has even pushed companies like Logitech (NASDAQ: LOGI) and Turtle Beach (NASDAQ: HEAR) to invest heavily on building out specialty gaming mice and headsets.

“We believe this trend of new engaging games will happen again and again over the years ahead, while the major eSports games of today will continue to grow,” said Logitech’s CEO, Bracken Darrell, on a recent call with investors. “But this engagement is not about a single game like Overwatch or fad. Gaming is a rare long-term secular and generational change,” emphasis mine.

And he’s right. There are now 2.1 billion gamers worldwide according to Statista, and that number is expected to grow to 2.73 billion by 2021. That growth in the number of gamers is expected to drive the industry to be worth $180 billion within the next four years.

While the big names in the video game industry are likely to have more room to run over the long term, there’s another video game maker who has caught my eye recently.

Take-Two Interactive (NASDAQ: TTWO) might be a smaller player than Activision and EA, but this video game publisher just had one of the biggest entertainment releases ever.

Its Red Dead Redemption 2 (RDR2) game hit the market on October 26. The game brought in $725 million in its opening weekend and has already sold more than 17 million copies globally. That puts RDR2 up as the second-highest grossing debut of an entertainment release ever, second only to the $1 billion in three-day sales delivered by Take-Two’s other blockbuster game, Grand Theft Auto V.

Red Dead Redemption 2 sold-in more units in its first eight days than the original blockbuster Red Dead Redemption sold in its first eight years,” said CEO Strauss Zelnick.

The RDR2 release was nothing short of jaw-dropping, and the sales data since suggests very strong continuing sales.

The stunning sales of RDR2 also puts it on-track to claim the title of 2018’s best-selling game, pushing Activision’s Call of Duty: Black Ops 4 out of the top spot. Black Ops 4 brought in $500 million in sales in its first three days, an impressive debut to be sure, but that falls well-short of RDR2’s $725 million in its first three days.

And the game is likely to already be profitable. It’s estimated the game cost somewhere in the neighborhood of $400 million to $450 million to produce and market, making it one of the most expensive games ever. If that figure is correct, the game more than paid for itself in just its first three days.

Such stellar performance has encouraged the company to boost its forecast for the year. “As a result of our strong performance in the second quarter and outstanding early results from Red Dead Redemption 2, we are increasing our financial outlook for fiscal 2019, which is also poised to be a record year for net bookings and adjusted operating cash flow,” said Zelnick.

This year was already anticipated to be a record year for the company, but management is now putting adjusted revenue at between $2.55 billion and $2.65 billion, representing growth of 42% to 48% year-over-year. Take-Two is also expecting income before taxes to come in between $236 million and $272 million – that’s a year-over-year increase of between 73% and 99%.

Guidance for the stock’s fiscal third quarter—ending December 31—is similarly impressive. The company sees net revenue coming in between $1.1 billion and $1.5 billion, or an increase of 129% to 139% over last year. It is also guiding that income before taxes will come in at $44 million to $58 million, an increase of 260% to 374% compared to the same quarter last year.

With all that good news, it’s surprising to see the stock down -12% for the month, but that looks to me like a possible good buying opportunity.

Analysts’ average price target for TTWO is $144.94, suggesting possible upside of nearly 34% over the next twelve months. Sanford C. Bernstein recently initiated coverage of the stock rating it an Outperform and setting their twelve-month price target at $175 – 65% higher than the current price.

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