Take Two Interactive (TTWO)
Take Two Interactive (TTWO: Charts, News, Offers), the video game publisher best known for its hit multi-platform titles Grand Theft Auto (GTA) and Bioshock, soundly beat earnings last week with revenue of $354.1 million, more than triple the $94.9 million the same quarter last year. The company’s net profit increased to $5.9 million, up significantly from the $56.5 million loss it incurred last year. Much of this gain was attributed to the release of Red Dead Redemption, a well-received Western GTA-style sandbox game, which has sold 6.9 million copies to date. CEO Ben Feder has claimed that the recent earnings represent a turning point for the company, which has often been branded as a one trick pony due to its reliance on its core Grand Theft Auto series to drive profits, as it proved that it has other titles in the its library that are equally capable of market success. Is it time to buy TTWO again as the cycle of video games heats up again?
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Stock Analysis
Take Two, like Activision (
ATVI:
Charts,
News,
Offers) and Electronic Arts (
ERTS:
Charts,
News,
Offers), is a publishing company which works with individual game developer studios. Whereas Activision and EA have huge stables of developers, Take Two only has two primary studios – Rockstar, best known for its
Grand Theft Auto franchise, and 2K, which is divided into three segments – 2K Play (casual/family), 2K Sports (licensed sports games), and 2K Games (the traditional hardcore game line, notably
Bioshock). The company is a dwarf in the land of video game studios – its tiny market cap of 805 million has made it a tempting buyout candidate for Activision (market cap 13.73 billion) and EA (market cap 5.44 billion). In fact, EA attempted a hostile takeover of Take Two in June 2008 prior to the release of
Grand Theft Auto IV, and TTWO shares surged to nearly $28 per share. Take Two resisted the takeover, and as the market crashed in late 2008, the stock hit bottom at $6.21 in February 2009. Today the stock is doing a little better, but nowhere near its former highs.
While
Red Dead Redemption does indeed demonstrate the ability of Rockstar to produce profitable games outside of its
Grand Theft Auto line, it also reveals a fundamental flaw in their game plan. Rather than create fresh new titles with new modes of gameplay, Rockstar has simply put another coat of paint over the free-roaming sandbox genre with a different title. Some critics, though lauding the polished game, which is basically GTA with horses, have noticed that Rockstar’s only successful titles have been these sandbox-style games. Its attempts to produce games outside that genre – racing with
Midnight Club, survival horror with
Manhunt – have been far less profitable or well-received as its GTA games. Rockstar’s new game,
L.A. Noire, which resembles a 1950s era
Grand Theft Auto, was delayed before announcing earnings, most likely to pacify those “one trick pony” critics of Rockstar. However, that’s not to say a video game studio can’t develop one line of games really well, as Rockstar does, and profit immensely over a long period of time. Square Enix, the makers of
Final Fantasy, have been wildly successful keeping their focus narrow and polished. In addition, Rockstar’s games are known for their meticulous quality – one need only to compare GTA to rushed sandbox clones like
True Crime and
Saints Row to realize the glaring difference.
2K Studios has been increasingly important to Take Two, although nowhere near Rockstar’s relevance yet. 2K Games’ Bioshock series, which combines first person shooter and role playing elements, has been wildly successful, and 2K Sports’ NBA, NHL and baseball titles remain a steady source of revenue for the company. It suffered a huge setback in 2004 when EA inked a 5 year exclusivity agreement with the NFL to feed its flagship Madden series, which cut other studios out completely. This deal has now been extended to 2012, much to 2K’s chagrin. 2K Play has been a place to put casual, budget and family games, but has not had a significant impact on the company’s bottom line.
Most analysts, however, are basing their recommendations on Rockstar’s prime releases. As of this writing, there is no official time frame for Grand Theft Auto V, though DLC expansions may keep the money coming in. Rockstar also isn’t likely to create another killer app for consoles anytime soon, and would probably be better off focusing on polished sandbox games. Take Two can follow Activision’s example and seek out smaller studios which can use licensed engines, such as Epic’s Unreal Engine, and churn out marketable products, rather than tread water and wait for the next big Rockstar release to boost profits. Now that the company has returned to profitability, it is of paramount importance that it invests in more studios to create more titles to satisfy the gaming public. Lastly, Rockstar’s games often take millions of dollars and years to create; by bringing in more studios, Take Two has a good chance at finding projects that can be developed faster at a lower cost, while biding time for its flagship franchises. With a steady stable of developers, Take Two may finally be able to achieve the stability of Activision or EA and appease disgruntled investors. When that day comes, it finally may be the day to invest in Take Two.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the
Stock of the Day analysis.
