Time For A Take-Two Holding Pattern

| About: Take-Two Interactive (TTWO)
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Take-Two (TTWO) reported excellent fiscal year 2014 earnings on Tuesday.

Unfortunately there was no timing visibility for the release of the critical next Red Dead game.

While waiting for Red Dead timing visibility catalyst use fair value annual earnings power multiples to guide your entries.

Take-Two (NASDAQ:TTWO) reported fiscal year 2014 earnings results on Tuesday. They were gang-busters. One year ago Take-Two gave fiscal year 2014 earnings guidance of $2.05 to $2.30 per share. The company wound up reporting EPS of $4.26 per share, more than double guidance and initial sell-side estimates. Revenue grew 97% y/y for the fiscal year to a record-breaking $2.4 billion thanks primarily due to Grand Theft Auto V's 33 million units sold.

However it wasn't only a Grand Theft Auto V year. On the earnings conference call, Take-Two gave sold-in unit numbers for NBA 2K14 at 6.5 million to date, Borderlands 2 at 9 million to date, Bioshock Infinite at 6 million to date, and Civilization V at 5 million to date. The company now has 10 franchises with over 5 million units sold. Morever the company said there were more than 10 unique next-generation titles in active development.

Take-Two gave guidance for fiscal year 2015 of $1.35-1.45 billion in sales and EPS of 80c to $1.05 per share. Remember a year ago they crushed their initial guidance, but I believe this year it will be prudent to think there is less upside in these numbers.

The personality of Take-Two stock over the last decade has been a series of rallies about two quarters into the launch of their two biggest franchises Grand Theft Auto and Red Dead. Obviously with last year's release of Grand Theft Auto V, we won't be seeing any new Grand Theft Auto sequel iterations for a while given the long development cycles. The key for the next big move in the stocks was any impending release or visibility for a Red Dead Redemption sequel, Take-Two's second most powerful franchise. The last version sold over 13 million units.

Unfortunately from the press release and conference call my first and most important take-away was disappointment there was no visibility or clues on the timing of the next Red Dead game. In fact I don't believe the Red Dead Redemption sequel is coming this coming fiscal year. The key tell for me was when the company gave guidance on the break-out of sales for fiscal 2015 of 55% 2K studio and 45% for Rockstar. If Red Dead was in the fiscal year, the Rockstar portion would be much higher.

It's much more probable at this point, we see a PC port of Grand Theft Auto V and/or Agent, Bully sequel, or a smaller Table Tennis-level engine test game in fiscal year 2015. In the last cycle, Rockstar developed a Table Tennis game to test and work out the kinks of their new Grand Theft Auto game engine. Morever waiting for the Sony PS4 and XboxOne console installed base to be larger into late 2015/2016 is the smarter move before releasing one of their franchise big guns like Red Dead.

This means we probably won't see any Red Dead anticipation catalyst move in Take-Two shares for some time. I would look at the stock in two ways. It will be a good entry about 2 quarters ahead of a Red Dead game release, when we get visibility on timing. The second way is to trade around the fair value of the company doing some basic multiple analysis.

The company has about $6.25 in net cash per share. Say $2.25 of that net cash is probably needed to run the business leaving about $4 in "extra" net cash. I estimate through a 5 year Grand Theft Auto and console cycle, Take-Two has about $1.65 in annual earnings power. It's up to you to put the right earnings multiple and add the $4 in net cash per share to get to your proper fair value estimate. If you give it a multiple of 10Xs the $1.65 earnings power plus the $4 net cash per share, that's a fair value of $20.50.

Without current Red Dead title visibility catalyst I'd be comfortable buying Take-Two in the low teens on a purely valuation basis. You can then rest assured, that the best, most talented video-game developer in the world will release Red Dead in either in late 2015 or 2016 as a nice catalyst for the shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.