Take-Two Interactive: Profiting From Controversy

| About: Take-Two Interactive (TTWO)

Where there is controversy, there are profits to be made. And when the word "controversy" is raised among gaming circles, this controversial company's name can't be too far behind. Take-Two Interactive (NASDAQ:TTWO) is still months away from releasing the next installment of the most controversial and intense releases to legions of fans, but already the anticipation is mounting, and the parental groups are lining up to protest, indirectly promoting the latest game.

And it doesn't hurt that a multi-billionaire corporate raider just bought 800,000 shares.

By October 17, 2006, shares of the beaten down software-company are likely to come back with a vengeance when its parent-scaring subsidiary releases its long awaited software. When it released its controversial Grand Theft Auto game in 2001, the stock ran from $4 to $10; in 2002, it ran from $22 to $23.50; in 2004, it ran from $16 to $21; and in 2005, it ran from $18 to about $22 in a month's time.

But come October 17, 2006, Take-Two subsidiary RockStar Games' "Bully" will be released, and could help refill the gaping bearish gap left at $16 - a possible 45% short-term return for patient shareholders.

Is any publicity, good publicity?

If you're Mel Gibson… uh, no. But look at what negative publicity can do to video game sales:

Grand Theft Auto III sold 11 million games annually.

Grand Theft Auto: Vice City sold 13 million annually.

Grand Theft Auto: San Andreas ("GTA:SA") was just as successful, selling 12 million copies in its first year out.

At $50 per game, GTA:SA did $600 million in revenue in year one. In fact, sales of this one game were so big that Take-Two even announced that it was a significant contributor to Q1 2005 numbers. Net sales for that quarter were $502 million, a 34% jump in a year. Net income was up 74% in a year.

RockStar Games, known for its violent, controversial and very popular Grand Theft Auto games is unveiling “Bully” just in time for the holiday shopping season. The best part -- the game isn’t out until October 2006 and already parental and anti-gaming groups are out in full-force.

But I say bring it on. It’ll only raise awareness for the game among millions of gaming fans, and bring in mega-sales for Take-Two’s subsidiary. In March, for example, the Florida Miami-Dade County School Board asked retailers not to sell the game to minors and asked the schools to warn parents about harmful effects of playing violent video games.

Even better, the end of this year is going to be one of the biggest seasons fro those in the video game racket. When Sony (NYSE:SNE) releases its PlayStation 3 and Nintendo (OTCPK:NTDOY) starts shipping the Wii, video game sales will go through the roof.

I love the Grand Theft Auto games. In fact, I’m one of millions that can’t wait for Bully to hit the shelves, and wouldn’t have heard about it if it weren’t for those groups and the media, which has a tendency to blow things way out of control.

But just why are people up in arms about a game?

Understandably, many are upset because they fear another Columbine-type situation. You see, the game’s main character is a 15-year old boy who has to defend himself against school bullies at a fictional boarding school in the United States while dealing with nerds, jocks, and authoritarians with weapons including baseball bats, stink bombs, and bags of marbles.

According to the New York Times:

Anti-game activists claimed that it would encourage players to become bullies themselves. Even some executives at other game companies feared that Bully, coming from Rockstar, a company that has long been a lightning rod for politicians and others fearful of video games, would drag the entire industry into yet another quagmire of criticism.

But that doesn’t mean the game won’t sell like flapjacks to millions of starving Ethiopians.

Following the billionaire’s lead

Billionaires aren’t dumb investors. If they were, they wouldn’t be billionaires.

Take Carl Icahn, for example. Here’s a rich guy known for buying up shares in companies and then pushing for major changes that may affect the company very positively. In recent quarters, he’s bought shares of Symantec and Cigna… and now, Take-Two Interactive.

According to an SEC filing, Icahn now owns a 1.1% stake in Take-Two. It’s unknown how he plans to positively affect the company after its recent legal issues, SEC and FTC investigations, and a Grand Jury investigation - all of which are priced into the stock.

His piece of the TTWO pie does mean he’ll make his presence known at shareholder meetings. We can assume he has a plan for where he’d like to take Take-Two.

There you have it. Two great reasons to be ultra-bullish on Take-Two shares: the October 2006 release of ”Bully” and a multi-billionaire’s purchase of 800,000 shares. Plus, as of late July 2006, more than 44% of the 72 million share-float was short. Shorts covering en masse come holiday shopping season could send the stock screaming much higher.

TTWO 1-year chart:

Disclosure: The author has no position in TTWO