These Three Stocks Had a Terrible 2022. Time to Buy?
Videogame maker Take-Two Interactive Software TTWO +2.75% is known for two things: Grand Theft Auto, and did I already say Grand Theft Auto?
The stock was down 43% in 2022, making it the group’s worst performer. Stifel analyst Drew Crum calls it a top pick for the new year, and GTA is only part of the reason. Ahead, his reasoning. Further down, bull cases on two other recent big decliners: Micron Technology MU –1.10% (MU) and Warner Bros. Discovery WBD +0.53% (WBD).
At one point in 2020, Take-Two shot from just over $100 a share to more than $200, and now it has given it all back. I pin that mostly on investors. There was a pandemic, and people did strange things. For a couple of weeks early on, I Clorox-wiped new Clorox wipe deliveries. Other people traded videogame stocks to questionable valuations.
This past November, Take-Two lowered its revenue guidance for its fiscal year through March 2023, and shares fell 14%. Management said that mobile gamers are pulling back on in-app purchases amid high inflation.
Take-Two is best known for big-budget console and personal computer titles that can sell for $60 or more. But over the past three years it went on an acquisition tear to boost exposure to fast-growing F2P or free-to-play games. Most notable of these was a $12.7 billion purchase in 2022 of Zynga, whose casual, phone-based games include FarmVille 3 and Words With Friends.
Whether the deal-making was poorly timed depends on what happens next with the economy. In high-end games, management doesn’t seem concerned. It plans to release 24 “immersive core” games from fiscal 2023 to 2025, versus just three last year. This year, fiscal 2023, it’s targeting five, leaving 19 for the following two years. Over the past three years, Take-Two’s game developer head count has shot up to 6,042 from 3,447. Its latest balance sheet shows a record sum in capitalized development costs.
In other words, Take-Two is betting big on game demand in the coming years. There are good reasons, according to Stifel’s Crum. The latest generation of game consoles is reaching a critical mass of users that should spur game purchases. Recent sales records for titles from other publishers, like Call of Duty: Modern Warfare II from Activision Blizzard ATVI –0.27% (ATVI), and God of War: Ragnarok from the gaming division of Sony (SONY), bode well for demand in a weak economy. Some publishers have pushed prices for marquee releases to $70.
Take-Two has sequels and reboots coming up for franchises that have sold well in the past, like BioShock and Max Payne. Its yearly NBA and WWE releases have become dependable moneymakers, and there’s a new deal with the NFL to take on the Madden franchise from Electronic Arts (EA). Also, Grand Theft Auto 6 is in development. There’s no release date yet, but any announcement of one could give the stock a lift.
The last full GTA release was all the way back in 2013. Company sales doubled that fiscal year, and GTA’s contribution went from 11% of total sales to 69%. Remarkably, the contribution was 31% last year, despite Take-Two’s expanding list of hits. That’s because the latest GTA release provides access to an online version with plenty of recurring revenue.
Credit that to CEO Strauss Zelnick, who has presided over an 833% return for Take-Two over the past decade, even with the recent decline. Free cash flow for the company is likely to turn slightly negative for the fiscal year on a surge in spending, but Wall Street puts it at $1.7 billion, or 10% of the current market value, within three years. That’s a lot of speculative free cash, which, combined with the anticipatory rumor foreshadowing on the new GTA release date, leaves me fully pre-convinced that shares have bottomed.
Here are two more of Wall Street’s buy-the-dip recommendations. Micron Technology was down 46% in 2022. Timothy Arcuri at UBS says to buy. The semiconductor industry has swung from fierce demand and short supply to bloated supply and iffy demand. Micron, a memory specialist, has slashed spending and output. Running below capacity will cut into margins.
Last fiscal year, Micron generated more than $3 billion in free cash. This year, it’s expected to burn more than $2 billion. Investors are left questioning whether the industry has moved beyond the boom and bust cycles of past decades.
Arcuri says this is all about Covid and shortage fears. “This drove customers to stockpile components that they could get their hands on and we now know that memory, with just about the shortest lead time in semis, was the poster child for stockpiling,” he wrote in a recent note.
But inventory digestion for memory could be relatively quick, too, Arcuri notes. He’s projecting $4.2 billion in free cash by fiscal 2024, rising to $6.7 billion the following year. If he’s right, the larger number works out to 12% of the current stock-market value.
On to streaming. Subscriber growth has fizzled, and companies have been spending lavishly on content, so investors have turned nervous. Warner Bros. Discovery was down 60% in 2022. Surveys show that subscribers are shifting to cheaper ad-supported plans where they’re offered. That could set up nicely for Warner, according to Matthew Harrigan at Benchmark.
Warner will combine its HBO Max and Discovery+ platforms into a service that aims to generate $1 billion in yearly earnings by 2025. An ad-supported tier could bring down churn, in Harrigan’s view. And Warner has been slashing spending even on its key superhero properties.
The upside: free cash flow for the company is pegged at $26 billion cumulatively over the next four years, which is $3 billion more than Warner’s market value. The downside: no Wonder Woman 3 with Gal Gadot. But if the lasso of truth compelled me, I’d call Warner the most appealing stock of the bunch.