1 green flag for Take-Two Interactive in 2022 and 1 red flag

Interactive Take-Two (TTWO -2.32%) investors have just received a bad surprise. The video game giant lowered its outlook for 2022 despite strong growth in the quarter that ended in September.

Worse, the new forecast calls into question some of the key reasons for management’s costly acquisition of Zynga earlier this year.

Let’s take a closer look at this challenge to Take-Two’s near-term growth, as well as a big reason to still love this title right now.

The Red Flag: Mobile Growth

It’s no secret that the video game industry is now experiencing a cyclical downturn after two years of strong gains. Engagement levels are simply not as high as they were in previous phases of the pandemic.

But Take-Two feels the heat more intensely than some peers. After betting $13 billion largely on the mobile market to fuel future growth, this segment of the industry is rapidly declining. Players aren’t as engaged and advertisers aren’t spending as much to get to those eyeballs.

As a result, management lowered its outlook for fiscal 2023, with most of the downgrade (just over two-thirds, executives said) coming from weakening mobile wallet trends.

The crisis also raises the risk that Take-Two overpaid for its acquisition of Zynga in early 2022. Stock valuations have fallen significantly since then, and a weaker mobile gaming industry almost surely means it will take longer to achieve the positive returns that management expected from the deal.

The green flag: portfolio strength

Ironically, it could be Take-Two’s former business that will end up supporting it during this current downturn. Content has sold well across 2K sports franchises and Rockstar Games brands such as Red Dead Redemption and Grand Theft Auto. Players buy titles from these brands, but also sign up for season passes and other live services.

Take-Two says this “post-launch monetization” strategy now applies to all of its game releases, and it’s powerful. “We experienced healthy player engagement, driven by exciting new game releases,” CEO Strauss Zelnick said on a conference call, “even as consumers continued to manage the effects of various macroeconomic and geopolitical factors. “.

Look forward

The next few quarters could see weaker overall growth as the mobile segment puts pressure on the overall business. Executives say they’re equally confident about the long-term returns from the Zynga acquisition, including more than $500 million in annual sales and access to more revenue streams like digital advertising.

Wall Street is more focused on the Take-Two red flag today, as well as the weak near-term outlook for the industry. This concentration helps explain why the stock is down more than 45% so far in 2022.

But Take-Two has a full portfolio of ongoing content releases, even if players spend a little less freely in some occasional niches. These launches could help the title recoup some of its recent losses in 2023. But investors should prepare for greater volatility in the coming quarters as large parts of the video game industry continue to slow.

Demitri Kalogeropoulos has no position in the stocks mentioned. The Motley Fool holds posts and recommends Take-Two Interactive. The Motley Fool recommends the following options: Long Calls January 2023 at $115 on Take-Two Interactive. The Motley Fool has a disclosure policy.