Outlook: Can Take-Two Continue to Rise After GTA V?

Grand Theft Auto 5

Take-Two Interactive (NASDAQ:TTWO) will report its fiscal Q3:14 (December) results after the market close on Monday, February 3, and host a conference call at 1:30 p.m. PT (877-407-0984 or at http://ir.take2games.com).

We expect a Q3 EPS beat driven by Grand Theft Auto V reorders, a strong debut for NBA Live 2K14, and digital growth. Our current estimates are for revenue of $700 million and EPS of $1.48, compared with consensus of $704 million and $1.37, and guidance of $650 – $700 million and $1.20 – $1.35. GTA V, which was released for the Xbox 360 and PS3 on September 17, was likely the industry’s best selling game in 2013, with worldwide retail sales of over $800 million for its first day of release, and over $1 billion for the first three days. On October 29, Take-Two announced that the game had sold-in nearly 29 million units to date. We estimate that Take-Two sold-in 6 – 7 million units of the game in Q3, helped by its October debut on Xbox LIVE Games on Demand.

We are lowering our Q4 estimates as significant releases have yet to materialize. We are also lowering our estimates for revenue and EPS to $150 million and $(0.16) from $250 million and $0.24 versus implied revenue guidance of $87 – $237 million. Earlier this month, it emerged Take-Two would not renew its MLB license after a decade of releases. Although this has minimal EPS impact, its absence will hurt top-line.

Contrary to speculation in recent weeks, there will not be an NFL game from Take-Two’s 2K Sports. On Tuesday, Electronic Arts (NASDAQ:EA) CEO Andrew Wilson announced that the company had “a number of years left” on its exclusive NFL agreements.

In November, Take-Two announced that it had repurchased all shares held by the Icahn Group. Shares traded down on the Icahn news, as the exit may have signaled a belief that shares would not increase in value, at least near-term. Also, his exit may have signaled that he doesn’t believe a sale of the company is likely. We believe the exit accentuates a lack of visibility into the long-term release slate.

We are maintaining our OUTPERFORM rating and 12-month price target of $19. Ourprice 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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