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Rahim is a technical and fundamental growth and value investor, and momentum trader. Known as the guy who called the AAPL bottom on June 29, 2013, published on his blogsite. A short-seller by training, Rahim has developed a system for identifying strong reward/risk entries at short-squeeze... More
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  • Take-Two And "Grand Theft Auto V": Investing Behind A Blockbuster Year 2 comments
    Aug 27, 2013 9:14 AM | about stocks: TTWO

    On July 30th 2013, shares of video game developer and publisher Take Two Interactive (NASDAQ:TTWO) traded higher in after-hours following a revenue and earnings beat against estimates, and narrowing losses as compared to the same quarter a year ago. In addition, the company reported an astounding earnings guidance for fiscal year ending March 2014, as it closes in on the launch of one of the most anticipated blockbuster games of the year, "Grand Theft Auto V" (GTA V). With share prices trading at its highest since the recession, is there still more upside? Yes, by at least 50%.

    First Quarter Earnings Highlights

    In the first quarter, revenue fell 36% to $144 million but exceeded the $100-125 million outlook, and earnings per share(NYSEARCA:EPS) increased 53% from a loss of 1.16 to a loss of 0.54 - which also exceeded the 0.55-0.70 loss outlook. The highlight for Take Two's first quarter was sales of Borderland 2, which sold nearly 7 million copies, and its add-on contents. Digitally delivered content grew 128% and accounted for yet another record 52% of the companies non-GAAP net revenue; the primary drivers here were add-ons and full-game downloads. Also important to note, the company completed a $287.5 million offering of 1% convertible senior notes due 2018 to redeem its previous 4.375% convertible senior notes due 2014 to raise money and to avoid share dilution until 2018. I encourage you to read this SA article as it talks in detail on the refinancing of the convertible senior notes.

    Blockbuster Outlook

    As a result of better than expected first quarter earnings and great retail feedback, the company has increased its outlook for full fiscal year 2014, on a non-GAAP basis, to $1.775-1.875 billion in revenue and 2.25-2.50 EPS. The outlook for the second quarter fiscal year 2014 alone is $750-800 million in revenue and 1.20-1.35 EPS, reflecting an expected blowout earnings as compared to second quarter a year ago ($288 million revenue, 0.11 EPS). Unsurprisingly, the majority of the second quarter revenue is expected to come from GTA V which has already sold about 1.5 million pre-orders in the U.S. alone (approximately 3 million worldwide) according to VgChartz.com, and is on track to set record pre-order sales. GTA V is due for release on September 17, 2013. In comparison, GTA IV sold 11 million units within the first month of release, 13 million units within 9 months and 25 million units to-date, whereas GTA V is expected to sell 18-20 million by fiscal year end March 2014, according to Sterne Agee analysts.

    GTA Online

    On Thursday August 17, 2013 Take Two's Rockstar Games unveiled GTA Online which will be released just 2 weeks after GTA V as a Massively Multiplayer Online Role Playing Game (MMORPG), in which up to sixteen players have the freedom to explore or cooperate to complete missions in an online community. Also interesting, the GTA Online will include a user-generated content component. Rockstar Games has made it clear that GTA Online will be an entirely different entity to GTA V although, initially, it will not be sold separately. Nonetheless, GTA Online will further engage and attract more GTA gamers and perhaps serve as a platform for additional revenue streams in the near future.

    Forward-looking PPS: $35/share

    As we approach GTA V release and second quarter earnings (to be announced October 28, 2013), let us take a look at the forward numbers as they are astonishing. TTWO is currently trading with a price/earnings ratio (P/E) of 29.0 which is above industry average. However if we consider the average P/E for the Multimedia & Graphics Software industry, which is 19.7, and work out the forward numbers we find TTWO to be a bargain at its current price ahead of second quarter earnings.

    • Price per share (or PPS) = PE x EPS(ttm)

    EPS(ttm) is the sum of EPS from the last four quarters.

    • EPS outlook for 2nd quarter fiscal 2014 = 1.20 to 1.34

    • EPS for 1st quarter fiscal 2014 = -0.54

    • EPS for 4th quarter fiscal 2013 = 0.38

    • EPS for 3rd quarter fiscal 2013 = 0.67

    • low-limit EPS(ttm) = 1.20 + (-0.54) +0.38 +0.67 = 1.71

    • hi-limit EPS(ttm) = 1.34 + (-0.54) +0.38 +0.67 = 1.85

    We now determine PPS, pro forma, for TTWO to be $33.7/share to $36.4/share

    • low-limit PPS = 19.7 x 1.71 = $33.7/share

    • high-limit PPS = 19.7 x 1.85 = $36.4/share

    • average PPS = $35.0/share

    Shares of TTWO are expected to trade at $35/shares yet it is currently trading around $18/share, or at nearly half its expected share value.

    Technical Analysis

    From a technical perspective, TTWO is bullish on every time-frame as it trades above the 20, 50 and 200 SMAs on the daily chart through the quarterly chart. Since the recent earnings beat, it has cleared resistance at $17/share, currently trading at its highest price since the recession, and aimed at filling the gap between 17.76 and 20.51. TTWO has traded as high as $29.60/share which is still below its expected fair value, indicating tremendous potential upside once it breakouts into all time highs. What is also interesting about TTWO is that it's trading with a high short interest (14.8 million, or 22%, shares short). As TTWO continues to hit new highs, shorts will be forced to buy to cover, which will further drive the share price up.

    (click to enlarge)

    I encourage investors to buy into TTWO ahead of its second quarter earnings and behind the companies blockbuster year. Shares now trade at half their fair value, pro forma, meaning there is still potential to see gains of over 50% by fiscal year ending March 2014.

    Risks

    If the overall economy worsens, gamers may not have discretionary income for video game purchases. Also, because GTA V will be released initially for the Playstation 3 and XBOX 360 consoles only, the release of the next generation consoles (i.e., Playstation 4 and XBOX One) may influence GTA V sales. The Playstation 4 console will be released mid-November.

    Disclosure: I am long TTWO.

    Additional disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Themes: technology, gaming Stocks: TTWO
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Comments (2)
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  • bencahn1
    , contributor
    Comments (31) | Send Message
     
    Great piece. My only concern is the next gen consoles coming out...but then if you look at pre sales as any indicator..it's nothing to worry about.

     

    I also think that if you can afford a new console, you can likely afford a few games.

     

    Lastly I think the time between the game's release and the PS4 is substantial enough for people to not want to wait.

     

    All of my friends who play video games will not be waiting. They will be buying it when it comes out.

     

    I guess my only concern would be the broader market and what it does.

     

    Oh and one more thing..I think your estimates are accurate but I also think there's tremendous potential for the stock to reach 25 by the week of GTA's release.
    28 Aug 2013, 11:58 PM Reply Like
  • ss23
    , contributor
    Comments (3) | Send Message
     
    Author’s reply » Bencahn1, you make a good point. The next gen consoles are not released until 2months after GTA V's release, so most gamers probably just wont have the patience to wait. And, most of GTA's sales are expected to come within the first month of release. So in other words, 2Q earnings will probably not be affected at all by the next gen consoles; Although, 3Q earnings may be affected.
    29 Aug 2013, 08:41 AM Reply Like
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