Outlook: Is Take-Two Interactive’s Future Still Uncertain?

Grand Theft Auto 5

Take-Two Interactive’s (NASDAQ:TTWO) Q2 beat driven by record-breaking Grand Theft Auto V sales. Revenue was $1,269 million versus our estimate of $875 million, consensus of $954 million, and guidance of $750-$800 million. On Tuesday, the company announced Grand Theft Auto V sell-in of nearly 29 million units to date. EPS was $2.49 versus our estimate of $1.50, consensus of $1.71, and guidance of $1.20-$1.35. GAAP EPS was only $(1.40), as revenue deferral rules required the company to exclude net revenue and COGS related to sell-in of Grand Theft Auto V due to the release of Grand Theft Auto Online in Q3, not Q2.

Guidance was solid, and we believe realistic. The company increased FY:14 guidance for revenue to $2.20-$2.30 billion from $1.775-$1.875 billion and for EPS to $3.50-$3.75 from $2.25-$2.50. We are increasing our FY:14 estimates for revenue to $2.36 billion from $1.97 billion and for EPS to $3.90 from $2.77 to reflect the Q2 beat and revised guidance.

It appears that Q3 revenue guidance includes approximately 5 million units of NBA 2K14, 3 million units of WWE 2K14 and 5 million units of GTA reorders, plus $50 million of digital sales. Given that we expect some catalog sales and some upside to digital, we think Q3 guidance may be conservative. Q4 implied guidance reflects a likely $150 million in GTA DLC sales, 1 million units of unannounced MLB 2K14, and modest catalog sales.

The cupboard still remains somewhat bare. Management reiterated that it expects Take-Two (NASDAQ:TTWO) to be profitable in FY:15 and every year for the foreseeable future. We are maintaining our FY:15 estimates for revenue of $1.20 billion and EPS of $0.75 as we have little visibility into next year’s releases other than the statement that the company has more than ten unique (unspecified) titles planned for the next-gen consoles, including multiple releases next year. Our estimate is not scientific, as we have no idea whether the next Rockstar title will sell 1 million or 10 million units, and Take-Two’s multiple remains low due to the uncertainty.

We are maintaining our OUTPERFORM rating and 12-month price target of $19. Our price target reflects a forward multiple of roughly 16x estimated sustainable EPS of $1.20 (fully taxed). This multiple is in line with industry peers, and reflects an improving outlook for publishers ahead of the launches of the next-gen consoles.

Michael Pachter is an analyst at Wedbush Securities.

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