2 historically loved video games could deliver a one-two punch to the gut of Take-Two Interactive's bottom line

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Video gamers aren’t so hot anymore on a couple video game favourites – and that could put pressure on Take-Two’s margins.

NBA 2K and Grand Theft Auto, which gamers have been obsessed with years, are seeing a material drop in sales. And that has prompted BMO Capital Markets analyst Gerrick Johnson to downgrade the stock.

“We are lowering the multiple at which we are valuing shares owing to heightened risk to earnings from what may be a slowdown in the rapid growth of the company’s NBA 2K and Grand Theft Auto franchises,” Johnson wrote in a note out to clients on Tuesday. He lowered his price target to $US116 from $US135.

Johnson’s call hangs on tepid sales numbers for those video games, which he thinks may remain weak. “We fear that recent declines in certain performance metrics we follow indicate an increase in this likelihood,” he said.

He cited Take-Two management explicitly announcing its frustration with NBA 2K sales, which plunged 44% year-over-year in April and underperformed company guidance. It’s a rare event that Take-Two underperforms its own guidance, which is usually conservative, Johnson pointed out.

NBA 2K sales rose 4% in 2016, as the industry’s sales declined 11%. Sales beat the industry again in 2017. But 2018 has been a different story. “Thus far in 2018, NBA 2K unit sales have declined 18%, while industry unit sales are down just 1%,” Johnson wrote.

Grand Theft Auto sales have also been declining, and are showing the “inevitable signs of fatigue,” according to Johnson. GTA’s April sales declined 40%, making for the “steepest monthly decline we have seen,” he said.

Screen Shot 2018 06 05 at 11.14.23 AMNPD Market Research, BMO Capital Markets

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