Significant Product Launches Will Drive These 3 Stocks In 2012

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Includes: AOL, NOK, TTWO
by: Simon Moore, CFA

A product launch can be a catalyst to drive stock performance, particularly where the product is significant relative to the stock's revenues, here are emerging products for 2012 that have the potential to drive their respective stocks.

1. Grand Theft Auto V from Take Two Interactive Software
Take Two Interactive Software (NASDAQ:TTWO), develops many successful computer games, but the Grand Theft Auto franchise has sold over 100 million copies, and the most recent release from 2008 has sold over 22 million copies.

Take Two's annual revenue is approximately a billion dollars, so selling ~20 million units of a game that retails for ~$50 is very roughly half Take Two's annual revenue after accounting for retail margins. Of course, the prior installment of Grand Theft Auto won many awards and there is no certainty that GTA V will be able to maintain the same level of acclaim and innovation, but the trailer from November 2011 has been well received and, similar to movies, sequels of strong performers do well on average.

The caveats are that the release date isn't known, though May 24 is speculatively rumored but not confirmed. For the last installment the release date was announced 3 months prior, so we would need an announcement relatively soon from Take Two for a first half launch. Take Two typically releases a big game in the early summer each year, and GTA V could be this year's. Nonetheless, it is possible that GTA V could slip to calendar 2013 given the absence of a formal announcement at this point.

2. Patch from AOL
AOL (NYSE:AOL) continues to lose its subscribers while simultaneously making bold acquisitions to grow its content position, such as the Huffington Post deal which closed last year. However, Patch is a promising concept that is starting to scale. You can see an example of the Patch site here to give an example of the content that is offered.

Patch is a series of local community-based sites, run by professional journalists and targeted at desirable local markets, specifically those that are attractive to advertisers. The key is scale, even though each site is local, AOL leverages common infrastructure as much as possible across all sites.

Patch was a small start-up when AOL acquired it in 2009, but with over 800 sites now, 2012 could be the year it hits maturity. The risks here are that the economics are as yet unproven, AOL has taken a concept and decided to scale it rapidly, so the profitability of the venture will not be evident until it hits scale.

As of May 2011, Patch had approximately a third of the Unique Views of Huffington Post (9M vs. 36M) according to AOL's analyst day presentations. However, Patch has recently come under fire from analysts for not meeting expectations.

3. Lumia from Nokia
Nokia (NYSE:NOK) has seen its stock fall over 80% from 2007 and its earnings are also down at least 75% from that date; and they are still declining. The Lumia range marks Nokia's concerted effort to return to the U.S. market with a touchscreen smartphone offering using the Windows Phone operating system.

Reviews so far have been good, but not great, with ratings in the 3.5-4 stars out of 5 range on CNET, with the iPhone and better Android devices scoring 4 out 5. So with the Lumia device, Nokia gets close parity with other devices, but does not beat them. Sales results are as yet unproven and it remains to be seen whether Nokia can match the U.S. execution of competitive brands such as Apple (NASDAQ:AAPL).

Valuation Metrics

Company Ticker P/E P/B Yield
Take Two TTWO n/m 2.1x 0%
AOL AOL 144x 0.8x 0%
Nokia NOK (ADR) n/m 1.3x 4.8%
Click to enlarge
Source: Google Finance

Conclusion
The success or failure of product launches is notoriously hard to predict. Research shows 70% of new products fail to earn over just $7.5M in their first year. Therefore, there are grounds for skepticism around any product launch. Grand Theft Auto appears the most likely to deliver given the track record of the franchise, but Take Two's negative earnings and a high multiple of book it is not a cheap stock, so some expectations for the product are already priced in.

On a book value basis, both AOL and Nokia appear to have some valuation support- if they are able to generate organic growth through new products. However, for both there is a significant track record of revenue and earnings decline that they need to reverse. This is something which also weakens confidence in any new products.

As a result, AOL looks like the strongest contender, the outlook for Patch is uncertain, but the strategy makes sense and the stock is cheap on a book value basis. Both Nokia and Take Two could also rally if the launches succeed, but the risk of a dividend cut for Nokia and a high price for Take Two, make them relatively less attractive bets.

Disclosure: I am long AOL, NOK, TTWO.