Take-Two Interactive Software Inc. is making a big bet on mobile and free-to-play gaming with its $ 12.7 billion deal for Zynga Inc., and at least one analyst isn’t sold on the strategic shift.
MoffettNathanson’s Clay Griffin lowered his rating on Take-Two shares TTWO, +1.95% to neutral from buy Tuesday, arguing that the company’s play for Zynga ZNGA, +3.73% moves the company farther away from an organic-growth story and adds more risk as Take-Two wades into the competitive world of mobile gaming.
Griffin was surprised by Take-Two’s interest in Zynga given that its management team had once likened the business of free-to-play gaming to playing the lottery, given the significantly lower probability of creating hits. Take-Two has made more “targeted bets” on mobile since then, through acquisitions of developer Playdots and others, but its larger deal for Zynga represents “a dramatic change of heart,” in Griffin’s view.
“While views obviously can and should change when warranted, this deal is clearly not in keeping with the original narrative,” he continued. Griffin previously saw Take-Two as largely focused on organic growth, with the belief that it could drive success through its intellectual property and strong execution.
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Amid Take-Two’s strategic change, Griffin argued that it’s “impossible to not
be concerned about the health of the original thesis.” Take-Two might still be able to drive strong margin and cash-flow growth through its foundation in AAA console and PC gaming, but regardless, the traditional part of Take-Two’s business is “now part of a bigger, and undeniably different story.”
Read: After billions in acquisitions, Zynga has still sold for less than its late-2011 IPO price
KeyBanc Capital Markets analyst Tyler Parker took a different view of the deal. Take-Two shares lost 13% in Monday’s session after the deal announcement, but Parker thinks the deal is appealing and upgraded the stock to overweight from sector weight Tuesday.
“We tend to prefer mobile exposure among the traditional publishers, and TTWO is acquiring a mobile asset with a strong five-year track record,” he wrote. “Combined, the entity should be able to deliver strong and stable growth that’s more concentrated on recurring revenues than TTWO standalone.”
Shares are up about 1% in Tuesday’s session. They’ve declined 16% over the past three months as the S&P 500 SPX, +0.22% has risen about 6%.