Here’s Why Take-Two is Set For Big Growth Ahead

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Maintaining our OUTPERFORM rating, but raising our 12-month price target to $19 from $15.50. Our revised price target reflects a forward multiple of ≈ 16x estimated sustainable EPS of $1.20 (fully taxed). This multiple is in-line with industry peers, and reflects an improving outlook for the video game publishers ahead of the launches of the next generation consoles, likely later this year. In addition, Take-Two (NASDAQ:TTWO) shares should continue to benefit from significantly improved execution, outstanding BioShock Infinite reviews, and the September launch of Grand Theft Auto V, all of which should drive FY:14 growth.

The game has an aggregate review score of ≈ 96 as of the time of writing, making it one of the best-reviewed games ever for the current generation consoles. We have modeled Q4:13 sell-in of 4 million units, due in part to the release date very late in the quarter; however, strong review scores should lead to greater long-term sales than we had previously anticipated.

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And EPS of $0.24, compared to consensus of $1.20 billion and $0.18, and guidance of $1.15 – 1.20 billion and $0.05 – 0.20. In our view, Take-Two has little incentive to materially exceed its FY:13 guidance; while there is room for the company to sell-in a greater number of BioShock Infinite units than we have modeled, we do not expect it to do so. We remain comfortable with our estimates, which are slightly above the high-end of top- and bottom-line guidance…

BioShock Infinite’s reviews should bolster reorders, benefitting FY:14 results. We are maintaining our FY:14 estimates for revenue of $2.10 billion and EPS of $3.00 for the time being, as the release slate remains largely unclear at this point in time. Although management has not provided detailed FY:14 guidance, it has disclosed that it expects significant revenue and earnings growth, and our bias is that Take-Two can materially exceed our estimates.

Grand Theft Auto V is coming in September. We expect the game to sell 20 million units in FY:14 and 24 million lifetime assuming an attach rate of 16% of the expected Xbox 360 and PS3 installed base at the end of June 2013.

Michael Pachter is an analyst at Wedbush Securities.

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