Seeking Alpha
Research analyst, growth, value, IPOs
Profile| Send Message|
( followers)  

Take Two Interactive (NASDAQ:TTWO) is an undervalued video game company that should be in your portfolio right now. The company is not a big one and relies on several blockbuster franchises to drive earnings for the entire fiscal year. The good news for Take Two is they have a couple of huge games coming out in the following year. The other positive news from the past week was the announcement that Carl Icahn had increased his stake in the video game company.

Carl Icahn Stake

Activist investor Carl Icahn continues to add to his position in Take Two Interactive. Rumors have his position increasing leading to a potential sale of the company. Last week, Icahn increased his position to 10.7% of outstanding shares. In a May article I wrote, I mentioned Icahn's then 8% stake as a good reason to get behind shares.

Icahn is the 21st richest man in the world, according to the latest figures from Forbes Magazine. Icahn has a wealth that is listed at $14.8 billion. The activist investor has found success buying large stakes in companies and turning them around through a series of methods including: changing board members, selling off assets, splitting the company, or an outright sale of the company. Any of these changes could greatly benefit Take Two shareholders.

Recently, Icahn bought a large stake in Netflix (NASDAQ:NFLX), as he believes the company is an acquisition target. The investor has been very vocal about the idea of the company selling itself, and investors have followed him back into the stock. The Netflix purchase was more newsworthy, as the company adopted a poison pill preventing him from increasing his position past 10%.

Icahn bought over 1 million new shares in the last week, taking his total stake up to 9.7 million shares. Icahn is probably betting on the company's exciting 2013 lineup, just like I was in several articles. The company has two huge blockbuster games coming out and Icahn could be thinking that the time for this company to be acquired by a larger video game company is in the short term future.

2013 Releases

Although it does not have an official release date, Take Two has confirmed that "Grand Theft Auto V" will be released in spring of 2013. The game will be released for both Playstation 3 and XBOX 360. "Grand Theft Auto V" will be set in the fictionally town of Los Santos. Pre-orders for the game began on November 5th, and already have the game ranking well on Amazon's top sellers in video games. The Playstation 3 version of the game ranks 133rd, and the XBOX 360 version was listed at 208th.

Recently, an analyst with EEDAR, said "Grand Theft Auto V" can sell 25 million copies of the game over a 12 month period. Jesse Divnich seems bullish on a video game being able to support the 25 million milestone with this highly anticipated Take Two game. "Grand Theft Auto IV", released in 2008, sold over 19 million copies across two platforms. Two Activision Blizzard (NASDAQ:ATVI) games from the Call of Duty franchise sold over 25 million copies. "Modern Warfare 3" broke revenue figures with its 2011 release and over 27 million copies sold. In 2010, "Black Ops" sold over 25 million copies, and a sequel in the next week is expected to put up higher numbers.

Grand Theft Auto is a well respected franchise and hasn't had a new major release since 2008. I recommended buying shares of Take Two back in May based on releases in the Grand Theft Auto and Bioshock franchises. I think "Grand Theft Auto V" will see huge pre-order sales as the release gets closer, which could make shareholders seeing huge gains.

Along with the release of "Grand Theft Auto V", Take Two will see "Bioshock Infinite" released in 2013. VGChartz reports that the game has over 273,000 pre-orders, with over 17 weeks left until the game's release.

Earnings

On October 31st, Take Two reported second quarter earnings. The company reported net revenue of $288.0 million (Non-GAAP). Take Two reported net income of $10.2 million, representing $0.11 in earnings per share (Non-GAAP). Sales were led by the release of Borderlands 2, and catalog titles. Digital revenue grew and impressive 108% from the previous year. Revenue from digital sales accounted for 20% of second quarter revenue.

"Borderlands 2" sold over five million copies between physical and digital versions of the game. The game is still selling well, and is on the top 100 bestsellers on Amazon. Early results from the company's "NBA 2K 13" game have been impressive as well.

Take Two raised its guidance recently for the third quarter and full year. The company now expects third quarter revenue of $325-$375 million. Earnings per share are expected to come in at $0.45 to $0.60. For the full year, Take Two expects revenue to hit $1.1 to $1.2 billion. Full year earnings are expected to be $0.00 to $0.20. Analysts on Yahoo Finance expect the company to earn $0.64 in the third quarter, on revenue of $365.6 million. For the full year, analysts see a profit of $0.29, from revenue of $1.21 billion. Putting this year's earnings aside, the important blockbuster 2013 has analysts a little bit more bullish. Analysts see the company earning $2.25 per share in the next fiscal year.

Analysis

Shares of Take Two trade at $11.03 at the time of writing. Over the last fifty two weeks, shares have traded between $7.37 and $16.99. Back in 2008, when the last big Grand Theft Auto game was released, shares traded around $25. With shares sitting at $11.03, the forward price to earnings ratio is a low 4.9. A simple price to earnings of 10, based on next year's sales would put shares at $22.50. A buyout from a rival could also bring an impressive return. This is the video game stock to buy between now and the spring of 2013.

*Sales figures from VGChartz.com*

Source: 2 Good Reasons To Own Shares Of Take Two

Additional disclosure: Author may initiate a long position in TTWO in the next 72 hours.