Take-Two Interactive Dives Despite Crushing Earnings Estimates

Take-Two Interactive Software, Inc. (TTWO) shares plunged 5.25% in extended-hours trade Monday despite the video games publisher delivering an upbeat quarterly report and surprising Wall Street with its full-year forecast.

The company behind “Grand Theft Auto,” “Red Dead Redemption,” and “NBA 2K” posted a fiscal Q3 adjusted profit of $1.25 per share, smashing expectations of 95 cents a share. Although revenues of $860.9 million declined from $930.1 million in the year-ago quarter, the metric came in ahead of the $757.5 million figure analysts had expected. For the year ahead, management expects earnings of between $4.08 and $4.18 a share on sales of $3.24 billion to $3.29 billion, comfortably ahead of Wall Street forecasts of $3.69 a share on revenue of $3.29 billion.

Video game stocks have been big winners during the pandemic as cooped up consumers look for ways to stay entertained while at home. Consequently, Take-Two has surpassed bottom-line forecasts in the past four consecutive quarters, prompting investors to expect impressive earnings beats.

A sell-off in after-hours trade appears to be an example of “buy the rumor, sell the news,” given that the stock has gained 26% since it last reported earnings back on Nov. 5. By comparison, the S&P 500 has added 11.5% over the same period. Moreover, the stock looks to be overvalued from a historical perspective. It currently trades at 36 times projected earnings, 17% above its five-year average earnings multiple of 30.78 times.

Wall Street View

Last month, UBS analyst Eric Sheridan downgraded Take-Two to ‘Neutral’ from ‘Buy’ while maintaining the investment bank’s $200 price target. Sheridan said he sees a “more balanced risk/reward” after a 37% run-up in the stock price over the past six months. Longer-term, the analyst believes the video game publisher sits well-positioned to capitalize on growth within the video game industry.

Elsewhere, the stock continues to rack up ‘Hold’ recommendations after its recent gains. Three months ago, four analysts issued a ‘Hold’ rating, compared to nine analysts currently suggesting holding the shares. Tuesday’s after-hours quote of $202.15 represents a 4% discount to Wall Street’s 12-month median price target of $210.

Technical Outlook and Trading Tactics

After consolidating for the past six weeks, the stock broke out to a new all-time high (ATH) on above-average volume Monday as investors anticipated better-than-expected earnings. However, as the price reached a new high, the relative strength index (RS) made a relatively shallower high to form a bearish divergence, indicating waning buy-side momentum and a possible bull trap.

Active traders who take a short position if the price reverses today should look to cover at $180, where the stock finds support from a previous line of resistance. Protect capital with a stop placed either above today’s or yesterday’s high.

For a look at today’s earnings schedule, check out our earnings calendar.