Market gives vote of confidence to Take-Two

Shares rise more than 5 percent on strength of fundamentals despite conservative 2005 guidance.

Even with yesterday's earnings call that reported a quarter-on-quarter loss, Take-Two shares were up 5.2 percent today. Shares of the game publisher closed at $33.67 by the end of trading Friday, up $1.67. The company was boosted by supportive analyst comments, with many maintaining “Buy” or “Outperform” ratings.

The reason for the positive outlook was the company’s strong fundamentals, which, in Take-Two’s case, is spelled “G-T-A.” Wedbush Morgan analyst Michael Pachter has high expectations for the upcoming sequel, stating “We expect the company’s Grand Theft Auto: San Andreas to set sales records when released next month.” Tony Gikas of PiperJaffray went a step further by saying, “San Andreas is poised to be the biggest video game ever.”

Not everyone was bullish, however. Shawn Milne of Friedman Billings Ramsey pointed out the Securities and Exchange Commission’s ongoing investigations of Take-Two as a dampening factor on the share price. Milne also takes the "glass is half-empty" view of GTA, expressing his concern over Take-Two’s reliance on the series. UBS’s Michael Wallace agreed, stating, “We believe consistency outside the GTA franchise still needs to be proven.”

Take-Two has definitely been diversifying, and most analysts drew attention to this, citing the successful launch of the newly discounted ESPN-branded sports games, which are currently performing well, although they're still playing second fiddle to Electronic Arts' full-priced sports titles. Sales of the ESPN games have been brisk and have led to high revenues, but the low price means a lesser impact on the bottom line.

Despite this, Pachter lauded the company’s strategy, stating that “although [Take-Two] is currently sacrificing margin to gain market share, we believe that it makes sense and will allow the company to hopefully move beyond its reputation as a one-trick pony.”

The performance of Red Dead Revolver, which sold around 850,000 units, and ESPN NFL2K5, with sell-through of about 1.3 million, is encouraging news for Take-Two. Looking ahead, titles like Midnight Club 3, The Warriors, and Charlie and the Chocolate Factory, all slated for 2005, will all contribute to determining the company’s longevity outside of the GTA franchise. PJ McNealy of American Technology Research stated, “The diversification of the publishing genres is a positive but will now really be a focal point for investors--likely until the April quarter of 2005.”

Thus, in the short term--for gamers and investors alike--all eyes will be on the October 26 PlayStation 2 launch of Grand Theft Auto: San Andreas.

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