Take Two Interactive Shares Still Undervalued For Fiscal 2014

| About: Take-Two Interactive (TTWO)

On Monday, video game company Take Two Interactive (NASDAQ:TTWO) saw shares soar in the after-hours trading after a surprise revenue and earnings beat. To go along with the beat, the company is closing in on the launch of one of the biggest blockbuster games of all time, "Grand Theft Auto V". So with shares at all-time highs, is there room left for investors to venture in?

In the fourth quarter, revenue grew 105% to $303.1 million. The company's prior outlook was sales of $235 to $285 million. Take Two experienced record digital revenue in the fourth quarter and saw the segment increase 192% from the prior year. The growing segment of digital sales made up 22% of the company's fourth quarter revenue. Strong catalog sales, which made up 25% of revenue, also helped the company blow past its previous guidance.

The highlight for Take Two's fourth quarter was the release of "Bioshock: Infinite". The third game in the popular "Bioshock" franchise was released in March. Take Two announced that the game has already passed 3.7 million copies sold. There have been strong "Season Pass" sales to go along with the popular game. Take Two will also launch downloadable content, which will power sales further.

For the full year, Take Two saw revenue increase 48% to $1.2 billion. Digital revenue increased 148% to $264 million. The company reported non-GAAP loss per share of $0.38. This is quite the turnaround from the $0.60 loss posted last year.

Highlights among video games from Take Two include:

  • "Max Payne 3" passed four million copies sold
  • "Borderlands 2" passed six million copies sold, and remains on track to be bestselling 2K game ever
  • "NBA 2K13" passed five millions copies sold

One area of growth not well covered by analysts is Take Two's international expansion through partnerships. Take Two recently entered a partnership with Tencent to bring "NBA 2K13" to China. The company also launched an online baseball game based on "MLB 13: The Show" in Asia. Take Two announced on its conference call that it is bringing a game based on the "Civilization" franchise to the Korean market, through a partnership from XLGAMES. "Civilization" has remained a popular franchise and will most likely transition well to the MMORPG universe.

Despite the strong quarter, Take Two has a strong year ahead with fiscal 2014 shaping up to be the best in company history.

According to VGChartz.com, here are the latest pre-order numbers for upcoming titles (rank).

  • (1) "Grand Theft Auto V (XBOX 360): 282,328
  • (3) "Grand Theft Auto V (Playstation 3): 242,020
  • (27) "XCOM: The Bureau" (XBOX 360): 25,095
  • (28) "XCOM: The Bureau" (Playstation 3): 18,991

The current fiscal 2014 announced lineup for Take Two is:

  • May 14: "Borderlands 2" DLC
  • June 25: "Borderlands 2" DLC
  • July 9: "Civilization V" expansion "Brave New World"
  • August 20: "XCOM: The Bureau"
  • September 17: "Grand Theft Auto V"
  • October 1: "NBA 2K14"
  • October 29: "WWE 14"

For fiscal 2014, Take Two expects revenue to be in a range of $1.75 to $1.85 billion. This will be made up of a revenue split, 50% United States and 50% international. Take Two also sees a split of 65% Rockstar and 35% 2K. Sixty five percent of revenue from Rockstar will primarily come from "Grand Theft Auto V". Sixty five percent of the mid range revenue target is $1.17 billion for the year.

Analysts expect Take Two to post revenue of $1.78 billion for fiscal 2014. This falls below the mid-point of Take Two's range, which could provide room for a revenue beat from strong sales of "Grand Theft Auto V" and catalog titles. Analysts see Take Two posting earnings per share of $2.26 for fiscal 2014. At Tuesday's price of $2.26, shares trade for less than eight times this year's earnings, representing a bargain to peers in the competitive video game market.

In a similar move with the video game industry and other Take Two titles, there will likely be downloadable content that will increase revenue and the staying power of the game. There has not been a new Grand Theft Auto title since "GTA IV" in 2008. The demand is there and Take Two will release the game for both XBOX and Playstation consoles. We are talking about a game that could pass 20 million in copies sold.

Strong sales of "Grand Theft Auto V" could power Take Two into expanding the franchise. I wrote previously about rumors of the company connecting all the Grand Theft Auto games into one or a MMORPG. Speculation and rumors about ideas like this will come about again in September and could send shares up dramatically.

To offset a delayed blockbuster release schedule, Take Two has a strong sports franchise to fall back on. The company has the most popular NBA and MLB video game franchises. Recently, Take Two also gained the rights to the WWE (NYSE:WWE) and will be able to produce games for the sport's huge fan base. This puts Take Two in a position similar to Electronic Arts (NASDAQ:EA) with Madden, FIFA, and NHL, where it can release new games every year and sell millions of copies to die-hard sports fans.

Rockstar releases one game every year and could announce a new game for the "Red Dead" series at any point this year which could provide a boost to shares. Also, a game to keep an eye on is "Agent", a strongly hyped game that was announced back in 2007. Since that time, gamers have eagerly been awaiting more details. Could this be the game announcement that Take Two uses after the September launch of "Grand Theft Auto V"?

The calendar year 2013 represents the 20th anniversary for Take Two Interactive. I have urged investors to buy into this company behind their blockbuster year. I am once again encouraging people to get behind this stock prior to the September launch of "Grand Theft Auto V". I had so much faith in Take Two that I included the company in my popular annual "Top Ten Stocks for 2013" list. Since that time, shares are up over 40%. Shares are up even more from my original May 2012 recommendation.

Shares now trade at less than eight times this year's earnings. Shares hit $25 back in 2008, on strong sales of the last Grand Theft Auto game. There is a chance that this could happen again and it would come at only 11 times analysts' predicted earnings per share. This is not completely out of the question, meaning there is still potential to see gains of over 50%.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TTWO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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