Take Two (NASDAQ:TTWO) has had a rather rough time after releasing GTAV. GTAV beat all expectations, but the stock fell victim to the "sell the news" phenomenon. And now, given the prospects for Electronic Arts (NASDAQ:EA) and Activision (NASDAQ:ATVI), as well as the bad numbers from GameStop (NYSE:GME) and Best Buy (NYSE:BBY), the stock is suffering again. Still, that might be about to change.
Short term risk
The main short-term risk facing Take Two is the fact that Electronic Arts might lay an egg. This is so because of how badly EA's Battlefield 4 franchise is performing.
At the same time, we know for a fact that the transition from old generation gaming consoles to the new generation (XBox One, PS4) is leading to lower software sales. The installed bases on the new consoles are still small, whereas people are no longer investing in games for the old consoles, except for the most powerful franchises - which include Grand Turismo 6 on the PS3, as well as GTAV - thankfully, Take Two's - on the XBox 360 and PS3.
While Take Two is not the main victim of these developments, investors can always generalize to the sector and punish Take Two.
In spite of these short term risks, I believe there's a massive catalyst emerging for Take Two. The catalyst is the launch of GTAV on the PC. There are already rumors surfacing about this near-term launch, including:
- A video on YouTube depicting a GTAV developer edition running on a PC, including video options which you'd only find in a PC version;
- The fact that Take Two asked to take down the video;
- And a rumored date for the launch: March 12.
The date is important, as it would still fall in the March quarter. As we will see, there is a high likelihood that the present numbers for the March quarter don't include this launch.
Not in the numbers
TTWO's March quarter consensus calls for $223.13 million in revenues. When TTWO launched GTAV for the console market, it booked adjusted revenue of $1.27 billion in the quarter, even though the game was launched on September 17 and the quarter ended on September 30.
This time, obviously many gamers already have the console version and so turnout to buy the PC version ought not to be as massive. But remember, expectations stand at just $223 million and it turns out that the PC gaming market is actually quite a bit larger than the console gaming market. A Digital River report puts the PC gaming market at 50% of the total with consoles controlling 30%. This works to mitigate the fact that console gamers have already gotten GTAV and thus makes it likely that this launch will be significant as well, leading to Take Two easily exceeding revenue and earnings estimates for the March quarter.
It is apparent that the rumored launch of GTAV for the PC is not yet in the numbers for TTWO's March quarter. With estimates pretty low and a rumored March 12 launch window, GTAV for the PC will allow Take Two to again unexpectedly smash the revenue and earnings estimates.
As the launch date gets closer, one would expect a new "buy the rumor" movement to emerge for TTWO, to be followed by a "sell the news" on the actual launch date. Either way, the prospect of TTWO easily beating estimates should provide a strong positive push for the stock.
Take Two reports the December quarter on February 3. To minimize risk it might be optimal to buy after TTWO reports the December quarter, as at that point EA will also have reported and one won't have the risk of TTWO somehow missing the December quarter given the weak software numbers out of the gaming retailers.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TTWO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.