Is This Billionaire Right?

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Run With The Best

Carl Icahn recently upped his stake in Take-Two Interactive (NASDAQ: TTWO) from a 12.9% stake to a 13.4% stake, meaning he now owns 12,020,744 shares. Take-Two is a videogame studio that makes games such as Grand Theft Auto, BioShock, Max Payne, 2K NBA, Borderlands, and Red Dead Redemption. In its latest quarterly report TTWO beat expectations with an EPS of $0.11, and their revenue came in $44 million higher than expected at $288 million on strong Borderlands 2 sales. With Icahn increasing his stake in TTWO some are guessing that he might push for a proxy fight, which could result in a sale of the company. The question is if Icahn is right--is TTWO worth the investment? Let's take a look.

The Grand Theft Auto Craze

One of the most anticipated titles in the videogame world is slated to come out in spring of next year: Grand Theft Auto 5. GTA 4 is still very popular, even though the game came out in 2008. Within my own friend group they are very excited for the next launch and are ready to lay down $60 to get the game. Expectations for GTA are very high, especially after what a hit GTA 4 was. GTA 4 made $500 million in revenue in its first week and 3.6 million copies were sold on the first day of its release. So far over 22 million copies of GTA 4 have been sold, and over 100 million copies of GTA titles have been sold. I think that GTA 5 will be a huge hit and will blow away expectations, just as GTA 4 did. 

BioShock Infinite

Another popular series Take-Two makes is BioShock. BioShock Infinite is going to come out on Feb. 26, 2013. Take-Two's shares skyrocketed over 20% back in 2007 when very favorable reviews came out for BioShock. The game blew away sales predictions and has so far sold about 4 million copies. BioShock 2 didn't do as well as the first one, as it only sold about 3.5 million copies. Both games got very high reviews and have a loyal fan base. Metacritic gave BioShock a 96 out of 100, and BioShock 2 an 88 out of 100. I'm optimistic about BioShock Infinite because when you don't release games once a year like Activision Blizzard (NASDAQ: ATVI) does with Call of Duty, demand builds up. If reviews come out and the game gets above a 90 I'm bullish on sales, but if it comes in below 85 then the trend doesn't favor TTWO and sales will come in at a lower pace. 

Competition

Competition in the videogame world is very intense. One blockbuster could ruin sales for another company. TTWO competes with Activision and Electronic Arts (NASDAQ: EA), along with many other videogame makers. Activision recently released its newest iteration of Call of Duty, entitled Black Ops 2. So far sales are doing very well, surpassing $500 million in the first day of its release. Microsoft's (NASDAQ: MSFT) Halo 4 also did very well, with sales hitting $220 million on the first day of its release. EA has several games that are slated to come out very soon, like Dead Space 3 and Crysis 3. Microsoft also has Gears of War Judgment coming out in Spring 2013.

 Now one can look at this in two ways. The first way (which is the bearish way) is that with consumers already buying up Halo 4 and CoD BO 2 they won't want to spend any more money on a new game, and that more competition is on its way. Or, the bullish way to look at this is to see the videogame market finally picking up steam and life being breathed back into the struggling sector. I think that these strong sales numbers will bode very well for TTWO, because the games it releases don't directing compete with ATVI's, EA's, or Microsoft's blockbusters like Call of Duty, Battlefield, Halo 4, or Gears of War. Their games target a slightly different audience, one looking for a story mode, not online play. Strong sale numbers point towards consumers getting ready to spend more on videogames and entertainment, which is good for the entire industry, including Take-Two.

Macro-Trends

The videogame industry has been suffering over the past several years as sales continue to decline. In October 2012 videogame sales were 25% lower than a year ago, which means that sales have declined 11 months in a row. It looks like November is going to be a very good month for the videogame industry, but it is hard to get in if sales look like they are going to keep declining once the shopping season is over. Some are saying that the recent success of Call of Duty and Halo could be a sign that the industry has hit a bottom and will post some growth going forward, but only time will tell.

Final Thoughts

Take-Two has several popular games that are going to be released in the near future, which I think will propel this stock higher. Grand Theft Auto 5 will surely be a knockout, and BioShock Infinite could also be a hit as well. For right now Borderlands 2 and Max Payne 3 are going to keep the money rolling in while investors wait for the upcoming launches. Borderlands 2 continues to sell very well and is beating expectations, which is what led the company to beat their latest quarterly earnings estimates. Competition will be tough for them and the overall trend of declining videogame sales isn’t going to work in their favor, but their product line up has resonated well with consumers in the past. I think Icahn is right and I am bullish on Take-Two Interactive.


callumturcan owns shares of Microsoft. The Motley Fool owns shares of Activision Blizzard, Microsoft, and Take-Two Interactive. Motley Fool newsletter services recommend Activision Blizzard, Electronic Arts, Microsoft, and Take-Two Interactive . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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