Michael Bryant's  Instablog

Christmas is here, and it’s time to cheer.  And there is no better gift than a new video game to celebrate the New Year.

Ok, well the holidays have gone, but 1^st quarter earnings are all about holiday sales.  And Take-two interactive (TTWO), a leading worldwide publisher and developer of interactive entertainment software and the maker of the hit game franchise Grand Theft Auto (GTA), is expected to have a great holiday.  Sales are likely to be rosy with general online retail holiday sales and consumer spending up from last year.

The company’s portfolio hosts 29 titles that have each sold more than two million units worldwide.  Besides GTA, its franchises include Sid Meier's Civilization®, Max Payne, Midnight Club, Red Dead Revolver, BioShock®, Sid Meier's Railroads!®, Sid Meier's Pirates!™, and Top Spin.  Licensed brands include Major League Baseball® 2K, NBA® 2K, and NHL® 2K.  And the company’s CEO also hinted at another new release to the GTA franchise. http://uk.ps3.ign.com/articles/112/1120512p1.html

There is always one more thing you can do when playing Sid Meier's Civilization®, which allows users to create empires, wage wars, discover the new world, and carry out diplomacy.  The franchise sold over 9 million units and is highly regarded as “one of the greatest strategy franchises of all-time.”  The game received a 9/10 score from consumer reports with minor criticism.  The graphics, in my opinion, is very, very good.

Max Payne is an award winning third-person shooter franchise with over 7 million units sold.  Midnight Club is a racing franchise, and Midnight Club: Los Angeles sold 1.58 million units for the Xbox360 so far.  Red Dead Revolver is a western third-person shooter game and was succeeded by Red Dead Redemption in May of 2010.   As of March 12, 2008, Red Dead Revolver sold 1.5 million copies, but Red Dead Redemption trumped figures with nearly 8 million units sold so far.  BioShock® has sold 4 million copies as of March 2010, and its second installment BioShock II is expected to reach 5 million units sold.  And NBA® 2K11 is currently the 70^th best selling game on Amazon.com.  So certainly the company has a list of some very strong names

Looking a little deeper into the stock, the fundamentals look impressive, as shown below:

Source: MSN Money

Its book value/share is $7.34, not far from the stock’s current price of $12.27.  Revenue/share is $13.87, greater than the stock price, and possibly signaling that the stock is undervalued.  In the revenue table, their revenue in 2010 has increased every quarter from the previous quarter.  Their earnings per share in the table is before GAAP, where as the earnings per share in the Financial Highlights is after GAAP.  That is why they are different.  But the point is that earnings per share also increased every quarter from the previous quarter.  This trend will likely to continue with strong sales of its games.

Below is a comparison of the company and its top competitors.

Source:  Yahoo Finance

From the chart, TTWO doesn’t look cheap.  Its short interest of 25% is the highest in the group.  This could put downward pressure on the stock, or it could cause a short squeeze, where those who are short are force to cover.  In the later case, the stock will jump.  This happens if a stock releases strong news such as sales.  It can also happen due to other strong upward momentum.  The latter is very possible given its chart below.

Source:  MSN money

Over the last five months, the stock has followed a nearly straight line upward, trading within a range shown by the two red lines.  Thus, it has a strong upward momentum.  Note the pullback to the lower red resistance line.  Odds are that it will reverse course and move higher, either to the upper red resistance line or somewhere within the band between the two red resistance lines.  But both cases tell that the stock will likely move higher.

Going back to the table of competitors, the metrics that stand out are the year over year quarterly revenue growth of 273.0%, the greatest in the group, and the price/sales of 0.78, the second lowest in the group.  This is good, because it say that the company is growing revenue fast and is selling for less than its sales, which can signal if a stock may be cheap.  Further if sales grow, the multiple will get lower, meaning the stock will look cheaper.

Even billionaire investor Carl Ichan has taken a liking in the company.  His firm, Icahn Associates Corporation, is the largest institutional holder with a 14.4% stake in the company.  Ichan is known for investing in undervalued, depressed shares, so this could be another reason that the stock may be a good buy.

All in all, TTWO may be a steal.  Sales are everything.  They dive revenue.  Profits cannot be made without sales.  And TTWO looks like it is going to win the war in sales.

Disclosure:  I do not own TTWO.  Article written for http://momentumoptionstrading.com/