Grim Outlook for Take Two Interactive (TTWO)

Jan.30.06 | About: Take-Two Interactive (TTWO)

Continued retail weakness for video game software has sent shares of Take Two Interactive (TTWO) straight down the toilet.

Since January 11th, shares of TTWO have tumbled 25%. Our skepticism at the time was warranted. As of today, we're reiterating our sell recommendation, as well as lowering our price target to $8.

Over the weekend, Banc of America issued a grim note in which they cited:

Damaging near-term, intermediate-term and longer-term risks...potential SEC investigations, and potential accounting restatements. Meanwhile, the company is burning cash at an alarming rate, and we think cash levels will approach $75 million by spring. We expect more title delays, key employee departures and corporate governance issues.

Long-term risks include overdependence on one brand and an unprofitable diversification strategy. We think the company runs the risk of degrading its Grand Theft Auto (GTA) franchise by porting GTA: Liberty City Stories to the PlayStation 2 just five or six months after its release on the PlayStation Portable. We believe a formal SEC investigation is an increasingly real possibility supported by the company's inability to file its 10-K annual report and insider sales.

We believe that Take Two's shares will see much more pain.

Potenially cannibalized/sluggish sales, further management erosion, and a staid gaming environment all spell one thing for Take Two: a mess bloodier than its games.

TTWO 1-yr Chart