StreetAuthority: Take Two

05/16/2003 12:00 am EST

Focus:

Paul Tracy

Editor, The StreetAuthority Market Advisor

"Here at the StreetAuthority Market Advisor, we expect market conditions to slowly improve in the months ahead as the economy and corporate earnings bounce back from a multi-year slump," says editor Paul Tracy. "With this in mind, we've decided to get a bit more aggressive with our recommended portfolios by adding a number of new stocks to our holdings." One such issue is Take-Two, a videogame software maker.

"A small videogame software maker -- Take-Two Interactive Software (TTWO NASDAQ) -- has the potential to deliver 30%-50% returns in the coming year. Since rumor has it that the firm could potentially make a bid for Vivendi Universal's videogame unit, I initially intended to hold off on adding TTWO to our Aggressive Growth Portfolio. However, given how strong TTWO's shares have been in recent days, I don't want to let this one get away from us. With a market cap of under $1 billion, this up-and-coming firm isn't widely followed on Wall Street. However, ask any serious videogame player about the firm and chances are you'll be met with a burst of enthusiasm.

"By creating games that other more family-oriented publishers have been hesitant to make, Take-Two has managed to gain control of one of the hottest and fastest-growing sectors of the videogame market -- mature-themed games. Sales of such games more than doubled last year -- jumping from ninr million in 2001 to over 20 million in 2002 -- and further growth is on the horizon. Take-Two makes one of the bestselling videogames on the market right now -- Grand Theft Auto. A crime adventure game that features violent, mature-themed content, the recently-released sequels, Grand Theft 3 and Grand Theft Vice City have each sold nearly ten million copies, ranking them as two of the bestselling videogames of all time. Part of this is due to a demographic shift in the gaming market, as older videogame players are now accounting for a larger and larger percentage of industry sales. This older age group is clamoring for high-quality adult-oriented games, and right now Take-Two is one of the only firms delivering the goods.

"Take-Two's revenues have soared from $365 million to $794 million since the year 2000. Meanwhile, company earnings have grown from just $6.4 million to $71.5 million over the same time period. That stellar growth record should continue in the years ahead as Take-Two introduces new hit games (its Rockstar unit alone is currently developing ten new titles) and fresh versions of its existing blockbuster Grand Theft Auto franchise (the next version is due out in 2004) and other popular titles. In addition, next year the company will benefit from another wave of Grand Theft Auto sales when its two existing versions finally become available for sale on Microsoft's Xbox and Nintendo's GameCube (Sony's Playstation 2 has exclusive rights until then).

"Despite Take-Two's amazing success over the past few years, many Wall Street participants have yet to discover the firm. Meanwhile, those familiar with the company appear to be treating TTWO as simply a one-hit wonder. But much like rival Electronic Arts has done in the sports-related game segment, I believe Take-Two has developed a lasting franchise with Grand Theft Auto. Future versions of this bestselling game (which now ranks fourth on the list of all-time bestsellers in the industry) should continue to sell well for years and years. Moreover, at current valuation levels (the stock trades at less than ten times next year's projected earnings of nearly $2.50 per share) it seems as though investors aren't expecting Take-Two to develop any other major blockbuster games in the years ahead. Yet judging from the firm's winning track record and its high-quality pipeline of games in development, that couldn't be further from the truth. The market will likely catch on to this tremendous growth story in the coming months and years, and as it does, I wouldn't be surprised to see TTWO head into the $30s by the end of 2003. And looking even further ahead, I expect the stock to trade up into the $40s by the time Take-Two releases its next Grand Theft Auto sequel in 2004."

Editor's Note:  "If you feel (like I do) that the stock is likely to bounce sharply higher in the coming months, then the best way to profit from anticipated movement would be to buy a plain-old ordinary call option on the shares. In particular, I'm looking at the September 2003 call options with a strike price of $25, which is currently selling for $2.75 per contract."

 

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