Take-Two’s stock [TTWO] has dived more than 13% since the beginning of the year. Beating up the stock was the $12.7b acquisition of mobile game publisher Zynga [ZNGA] - a price tag that investors seem to think is just too high.
However, the deal could make strategic sense for Take-Two. The publisher of the Grand Theft Auto series currently makes a fraction of its sales through mobile gaming. Through the purchase of Zynga it will add the app-tastic likes of Farmville and Harry Potter: Puzzles & Spells to its catalog, while picking up the intellectual knowhow to l become a heavy weight in the mobile games market.
And while investors don’t seem too sure right now, several Wall Street analysts are backing the deal.
Why Zynga deal matters for Take-Two’s stock
Take-Two’s stock has been hit by a combo of the sheer cost to buy Zynga deal and the wider tech selloff. Yet, investors seem to have started to digest the news of the deal, with the stock having recouped some of the losses since mid January.
The cash and shares deal valued Zynga at $9.86 a share - a $0.64 premium to its closing price on 7 January, according to a statement from Take-Two. Combined, the two companies have a revenue of over $6bn in the past 12 months.
Take-Two and Zynga's combined revenue over 12 months
The deal should help Take-Two incumbent gaming heavyweights such as Activision Blizzard and EA, all of which have been making acquisitions to compete in the booming mobile games market.
Take-Two chief executive Strausss Zelnick will be at the combined companies helm, with Zynga’s executive term, headed by Frank Gibeau, leading its mobile efforts.
“We are thrilled to announce our transformative transaction with Zynga, which significantly diversifies our business and establishes our leadership position in mobile, the fastest growing segment of the interactive entertainment industry,” said Strauss Zelnick, Chairman and CEO of Take-Two.
Ultimately, however, this could translate into something of a bargain. Longer-term powering up on its mobile gaming capacity should bolster the quality of the Take-Two’s and its revenues.
Take-Two said that it expects the transaction to create $100m in annual cost synergies, and over $500m in annual net bookings over time. By fiscal year 2023 Take-Two thinks that 50% of its Net Bookings will be through mobile, up from an estimated 12% in fiscal year 2022.
And If you thought the Zynga deal was expensive, that’s nothing compared to the $70bn Microsoft is spending to buy Call of Duty maker Activision Blizzard, in a deal announced Tuesday.
Where next for Take-Two’s stock
Wedbush analyst Michael Pacher is backing the acquisition of Zynga, suggesting that it will significantly boost Take-Two’s mobile offering. The analyst chalks up Take-Two’s stock dropping as a result of the difference in the deal price and Zynga’s price on the market, as reported by Barron’s.
“I think they know that, and think Zynga guys are excited about the opportunity to gain access to various Take-Two franchises,” Pachter said. “Take-Two goes from 10% mobile to over 50%, making them a more steady grower than they were before with an unclear release schedule for their large games. I think it’s a great fit.”
“I think they know that, and think Zynga guys are excited about the opportunity to gain access to various Take-Two franchises. Take-Two goes from 10% mobile to over 50%, making them a more steady grower than they were before with an unclear release schedule for their large games. I think it’s a great fit” - Wedbush analyst Michael Pacher
Redmond James’ Andrew Marok wrote that ‘mobile remains the largest and fastest-growing platform in gaming’ in a note to investors, and the deal signaled Take-Two’s ambitions in this area.
BMO Capital analyst Gerrick Johnson upped his rating on TakeTwo from Outperform to Market Perform, sticking with his price target of $180. In a note, the analyst suggested that the acquisition should help ‘smooth’ the publisher's earnings, while helping leverage some of the ‘most iconic video game properties’ for mobile.
KeyBlanc’s Tyler Parker also sees the deal as a strategically sound move that will enable TakeTwo to use its strong IP on mobile. The analyst moved his rating from Sector Weight to Overweight, with a $185 price target.
Going the other way was WellsFargo’s Brian Fitzgerald who lowered his price target from $235 to $190, citing the recent tech selloff and the market’s initially tepid response to the deal. Still, Fitzgeral’s target would see a decent 23% upside on Tuesday’s close.
Among the analysts tracking TakeTwo on Yahoo Finance, the stock has an average $206.09 price target - hitting this would see a 33% upside on Wednesday’s close. The next important date for interested investors is 7 February when Take-Two will report third quarter results for fiscal year 2022.
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