We recently published a list of BofA’s Top 10 Growth Stocks with The Fastest Projected EPS Growth Rates. In this article, we are going to take a look at where Take-Two Interactive Software, Inc. (NASDAQ:TTWO) stands against other best BofA’s top growth stocks with the fastest projected EPS growth rates.
For the stock market, if there’s one thing that can be said with some certainty, it’s that earnings and revenue growth drives share price performance. This is because a firm’s stock price is a reflection of investor estimates of its future market potential. Firms that are believed to gain market share in the future often see their share price surge in the present as investors tailor their portfolios to try to get an early position in some of the biggest names of tomorrow.
In fact, we don’t have to dig too deep to see this principle in action. The clearest example of it is in the stock of the AI chips company that’s Wall Street’s favorite AI stock so far. Its stock is up 199% year to date, 235% over the past twelve months, and 887% since the start of 2023. While all these returns are something that most–if not all–company executives would give an arm and a leg for, to see our principle in action, we’ll have to dig deeper into the 887% share price gain.
Narrowing down our analysis to this stock’s performance in 2023–from the start and to the end of the year–its shares gained 239%. During the first half, they gained 189.5% and during Q1, the stock was up 90%. So, the shares’ performance in Q2 has proven crucial as the starting point of a rally that has so far yielded an 887% share price appreciation. During Q2, the stock was up 52%, driven by the fact that on May 24th, 2023 (during the Q1FY24 earnings), the firm’s CEO stunned investors when he shared that “A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.”
This meant that CEO Jensen Huang believed that in the future, businesses would spend as much as $1 trillion on his company’s products. Investors were ecstatic and they piled into the company to send its shares soaring by 24.6% between May 19th and May 26th. In this company’s case, the CEO’s optimism was also met by cold, hard results. During the same Q1, the firm’s data center business division revenue jumped by 14% annually, in a sign that foretold the growth story of the next quarters. Mind you, this fiscal Q1 was only the second quarter following OpenAI’s public ChatGPT release, so the AI wave that solidified in Q4 2024 was in its infancy.
These hard results saw the firm annually grow its revenue by 101%, 206%, 265%, 262%, and 122% in its Q2FY24, Q3FY24, Q4FY24, Q1FY25, and Q2FY25, respectively. The top line growth has been accompanied by bottom line profits also jumping by triple digit percentages in all of the quarters. The highest reading was for Q2FY24 when its non-GAAP net income jumped by 843% year-over-year.
Thus, it’s safe to say that growth is rewarded by the stock market. Yet, the high investor expectations for growth stocks also mean that they are punished harder in case they fail to meet expectations. Research from the University of Michigan analyzed data for 13 years covering consensus earnings forecasts, quarterly earnings, stock prices, market to book ratio, and price to earnings ratio to check whether growth and value stocks perform similarly if they fail to meet earnings expectations.
Their results show that growth stocks tend to fall more than value stocks when it comes to negative earnings surprises. The researchers add that the underperformance is typically before the earnings are announced since growth stocks typically preannounce their negative earnings surprise. A descriptive analysis of their data also shows that cumulative stock returns for the days between two earnings cycles are higher for low growth stocks over high growth stocks. For the lowest growth stocks, the cumulative returns for all firms analyzed were 0.66%, while those for firms with negative and positive earnings surprises were -3.57% and 5.44%, respectively. For the high growth stocks, cumulative returns for all firms were -0.58%, and the returns for those with negative and positive earnings surprises were -7.32% and 6.32%, respectively.
The research concisely sums up the potential of investing in growth stocks and the accompanying risks. Returning to our GPU designer, while right now it’s at the center of the AI buzz, back in 2017 and 2018, it was at the center of the Bitcoin rush since gaming GPUs could also be used to mine cryptocurrencies. However, between mid-December 2017 and mid-December 2018, Bitcoin’s price dropped by 83%. For the firm’s quarter that ended in January 2019, this led to its gaming GPU revenue dropping by 45% year-over-year and 46% sequentially. This was because the crypto sector had over ordered GPUs, but as Bitcoin prices fell, mining became unprofitable and the over-ordering led to a glut in the market. Looking at the firm’s post split stock price, this led to the stock falling by 53% between October and the end of December 2018.
Our Methodology
To make our list of BofA’s top growth stock picks, we used the bank’s latest list of stocks that are rated Buy, have an EPS surprise rating, and the highest projected growth rates for the next five years. The stocks were ranked by their projected EPS growth rates.
For these stocks, we have also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of a hand holding a game controller, demonstrating the interactive entertainment of the company.
Take-Two Interactive Software, Inc. (NASDAQ:TTWO)
Number of Hedge Fund Holders In Q2 2024: 48
Projected EPS Growth Rate: 60.5%
Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is a New York City-based video gaming company. It is behind some of the most well-known video game brands in the world, such as Grand Theft Auto and Red Dead Redemption (Rockstar Games is owned by Take-Two). Consequently, Take-Two Interactive Software, Inc. (NASDAQ:TTWO)’s narrative depends on the firm’s ability to regularly launch video games and increase its bookings over time. The firm is currently preparing to launch GTA VI in 2025, and the game–along with other titles–is responsible for the fact that it is at the top of our list. This is because successful video game titles add to Take-Two Interactive Software, Inc. (NASDAQ:TTWO)’s revenue, and apart from GTA, other upcoming titles for 2025 include Borderlands 4, Sid Meier’s Civilization VII, and Mafia: The Old Country. As a result, successful launches tend to create tailwinds for the stock, while consistent delays can create trouble.
During its fiscal Q4 2024 earnings call, Take-Two Interactive Software, Inc. (NASDAQ:TTWO)’s provided its outlook for the coming years and the current quarter:
“As development advances, our confidence in the title and its potential commercial impact continue to grow. That said, we are not providing specific guidance beyond fiscal 2025, as our release schedule includes numerous titles each year and even modest shifts can have a significant effect on results in any given period. Our outlook for the lifetime value of our pipeline remains as strong as ever and we expect sequential growth in net bookings in Fiscal 2025, 2026, and 2027. Now, moving onto our guidance for the fiscal first quarter. We project net bookings to range from $1.2 billion to $1.25 billion, compared to $1.2 billion in the first quarter last year. Our release slate for the quarter includes TopSpin 2K25, No Rest for the Wicked on Early Access for PC and NFL 2K Playmakers, all of which have already released, and Star Wars Hunters.
The largest contributors to Net Bookings are expected to be NBA 2K, the Grand Theft Auto series, Toon Blast, Empires & Puzzles, our hyper-casual mobile portfolio, Match Factory, the Red Dead Redemption series, Words With Friends, and Zynga Poker. We project recurrent consumer spending to increase by approximately 1%, which assumes mid single-digit growth in mobile, flat results for NBA 2K, and a decline for Grand Theft Auto Online. We expect GAAP net revenue to range from $1.3 billion to $1.35 billion. Operating expenses are planned to range from $928 million to $938 million. On a management basis, operating expenses are expected to grow by approximately 14% year-over-year, which is primarily driven by additional marketing for Match Factory, partially offset by our cost reduction program.”
Overall, TTWO ranks 1st on our list of best BofA’s top growth stocks with the fastest projected EPS growth rates. TTWO is one of the top stocks with the highest consensus earnings growth according to BofA. While we acknowledge the potential of TTWO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TTWO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
