Take-Two Interactive's guidance is 'draconian' amid gaming slowdown: Analyst
CFRA Senior Equity Analyst John Freeman joins Yahoo Finance Live to discuss quarterly earnings for Take-Two Interactive and Activision Blizzard.
Video Transcript
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RACHELLE AKUFFO: All right, well, let's break some of this down, as we're seeing those shares of gaming companies, Activision Blizzard and Take-Two Interactive moving after reporting earnings today. CFRA Senior Equity Analyst John Freeman joins us now to get into all the numbers. So, John, let's start, first of all start with Take-Two, what we're seeing here. What concerns you most out of this earnings data?
JOHN FREEMAN: It was the guidance. This is the Christmas season they're guiding about. And a $200 million difference is a lot. So I want to know, I'd like to know on the call, what exactly is getting them so pessimistic. I can kind of understand that the macroeconomic situation is pessimistic. We have inflation, we have all this stuff. But I mean, that guidance was pretty draconian.
And I would think that there would be more than just, oh, macro is terrible, here's I don't know, we're just going to try to do this, as a guidance. Because I think there might be something more specific going on, at least I would like to think so, because otherwise, it just that seems just a little bit too draconian for just a normal sort of situation, even given the macroeconomic situation that we have now.
SEANA SMITH: Yeah, John, it certainly seems like that, at least when you compare what we're getting from Take-Two to what we just heard from Activision Blizzard just a few moments ago. But drilling down into Take-Two, the reaction that we're seeing on the street, with shares off pretty significantly right now, I know you want to learn more on the call, but do you think that this might be a bit of an overreaction to the guidance that we're getting?
JOHN FREEMAN: I don't know if it's an overreaction to the guidance. The guidance might be overly conservative, meaning the guidance might be a sandbag. That is, they know they're going to get hit anyway, so they might as well, oh, I'll take it down a little bit, maybe lower, a little bit more, so that they know that they can hit it.
In times like these when everything is kind of going bad, there is, I think, a smart tendency if you're in terms of investor relations and that kind of thing to, I don't know, lower the guidance. If you're going to lower it, lower it a lot, and make sure that you hit it. Because that's kind of what I see. The stock's down what? High single digits, low teens, that kind of makes sense given the degree of guidance lowering.
RACHELLE AKUFFO: And you mentioned, obviously, both companies dealing with macroeconomic headwinds, but you have a hold rating on Activision, you have a buy rating on Take-Two. What, if anything, would make you change that based on what you might hear on the earnings call?
JOHN FREEMAN: So for Activision, it's all about the acquisition. And at this point, I'm not sure it's going through. There's a lot of regulatory scrutiny on this. I was spelling that before. It's kind of why I did downgrade to hold, because, but I mean, look at the price differential. It's a $95 acquisition offer and the stock is trading at $72?
That's the greatest arbitrage spread I've seen ever. Like, you want to see a young Eric Mindich get out there and make some money. That is the biggest spread I've ever seen. Like, that doesn't make any sense. That kind of tells you that the regulatory scrutiny is probably, it means it's going to be blocked.
Or it's going to be so prohibitive, that Microsoft just goes, hey, we have a $3 billion out. Here's $3 billion, Activision, thanks a lot. They've got $50 billion plus net cash on the balance sheet. They don't have, $3 billion is not that big a deal to them. It might be a nice little going away present for Activision, but obviously, not $95 a share.
SEANA SMITH: Yet Activision still saying that they still see Microsoft closing the deal by the end of June 2023. John, let's talk about some of the numbers that we're getting from "Call of Duty Modern Warfare."
JOHN FREEMAN: Sure.
SEANA SMITH: The fastest selling title in franchise history, crossing a billion dollars in sell-through in just 10 days. How does this set us up? Obviously, very well for the holiday season, but further out into 2023?
JOHN FREEMAN: Well, I think that's the reason you want to own Activision. Is not just, the "Call of Duty" franchise, it's not just about the game itself, which is an amazing game. People love it, so forth. It's about the interaction and the play among users, and the sense of camaraderie, the fact that it almost has like a strong social network sort of appeal to it, so people come back. That's powerful. That's what Microsoft is buying.
The other parts of Activision, particularly with the internal management and the issues, it was a year ago with the sexual harassment lawsuit, which is still outstanding, that gives you pause as a balance. So yeah, I work all the way through that and I come out with hold. But certainly, "Modern Warfare" is a, I think it's a game-changing game in that given that strong sort of sense of play togetherness and that sort of social media aspect, the social aspect to pull everybody in, that's a franchise you can make money on for another decade at least.
SEANA SMITH: All right, Activision barely positive here in after hours, up just around 4/10 of a percent. Competitor Take-Two, on the other hand, sinking in after hours trading, off just around 14% right now. John Freeman, always great to have you. Thanks so much for joining us.
JOHN FREEMAN: Thank you so much, appreciate it.
