Bull of the Day: Take Two (TTWO)

For the better part of the last 14 years I’ve been a market nerd. It totally and completely consumes me. I fall asleep to the Nikkei 225 Futures on a laptop beside my bed. I wake up to check the S&P 500 e-mini’s. My entire day is spent watching stocks across various industries ebb and flow with the market. And I just can’t get enough of it.

Another side of my nerd-like tendencies is gaming. As in video gaming. Before I was a typical casual gamer. Over my life I’ve had various gaming consoles ranging from the Sega Master System, to Genesis, to Playstation to my current XBOX 360. It’s on this latest platform that my nerd went nuclear. I went “Turbo Nerd.” I was playing Grand Theft Auto Vand the perfect marriage of my nerd sides occurred when I realized the game had a built-in stock market. Stocks would go up and down based on what you did in the game and based on what other players were doing.

A few short weeks later, my GTA V character literally had $2 billion worth of in-game currency. Thanks almost exclusively to the perfect harmony of nerd that was singing through my XBOX controller. Then the stock nerd took over again as I thought to myself, “Who’s the company that makes this game?”

Take Two Interactive (TTWO) is the company behind Rockstar and 2K Games that made this masterpiece I was playing. The video game maker owns some of the most popular gaming franchises including BioShock, Borderlands, Grand Theft Auto, NBA 2K, Midnight Club, and Sid Meier’s Civilization. In all, Take Two has 10 franchises that have sold over 5 million units a piece. The crown jewel, the Grand Theft Auto series, has sold over 185 million units including 33 million for the latest installment GTA V. For the record, GTA Vreached $1 billion in retail sales faster than any entertainment release in history.

One area that Take Two is capitalizing in is digitally-delivered content. Before, games had to be printed on CD or DVD, covers made, manuals, then packaged up, delivered to stores and then into the hands of buyers. All this added cost was lost revenue for the game developers. They had to cut the middle man in on this process. Well now with the availability of high-speed internet this is starting to become a thing of the past. Users now can download their favorite games directly from the company’s website or vendors like the XBOX Life Marketplace or Playstation’s Now Network. This means more revenue for the developer. In fact, digitally-delivered revenue accounted for 18% of total revenue for TTWO in FY2014, up from only 8% in FY2010.

Here at Zacks we like TTWO because of recent upside estimate revisions by analysts. Currently TTWO is a Zacks Rank #1 (Strong Buy) in an industry that ranks in the Top 19% of our Zacks Industry Rank. A big reason for this a recent analyst earnings estimate revision that pushed consensus for next year up from 72 cents per share to 77 cents.

This quarter’s numbers were disappointing to some on the street but that’s already in the past. The company has a pipeline of new games coming to the market that will likely boost revenues in the future. Among the releases is the much anticipated release of GTA V on the PC. This recent sell-off may be the perfect opportunity to gain some exposure to this stock.

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— Zacks Investment Research

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