Is Take-Two a Cautious Buy After Earnings?

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With Take-Two Interactive Software (NASDAQ:TTWO) releasing its second quarter earnings, is the video game developer and publisher a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

E = Earnings Are Increasing Quarter over Quarter

Take-Two does not have the strongest record when it comes to earnings. For the quarter ended June 30, the company reported a net loss of $110.8 million ($1.30 per share), compared to an $8.6 million loss in the previous quarter. On an adjusted basis, Take-Two reported a loss of $1.16 per share, far worse than the 59 cent loss consensus. Revenue for the quarter also plunged 32.4 percent to $226.1 million, compared to $334.4 million a year earlier. Adjusted earnings for the company have declined for the past three quarters, falling short of estimates in two of those quarters.

On Tuesday, Take-Two was scheduled to announce its latest financial results for its second quarter of fiscal year 2013, but had to postpone the release due to hurricane Sandy and the catastrophic weather conditions in the region of its New York headquarters.

The company reported its earnings for the latest quarter on Wednesday morning. The net loss narrowed to $12.4 million (15 cents per share), compared to $47.4 million (57 cents per share) a year earlier. Revenue also increased more than twofold to $273.1 million. However, Take-Two reduced its profit forecast for the year ending in March.

C = Catalyst for a Stock’s Movement

When Take-Two reported earnings for the quarter ended June 30, it certainly served as a catalyst for the stock price to move. Unfortunately, it moved more than 10 percent to the downside. Looking forward, one of the biggest catalysts for Take-Two, besides earnings, will be its upcoming release of the highly popular Grand Theft Auto V video game.

The addicting open world game has been delayed in the past, but the company offered a sigh of relief for gamers and investors. On Tuesday, Rockstar Games, a publishing label of Take-Two, announced that Grand Theft Auto V is expected to launch worldwide during spring 2013 for Sony’s (NYSE:SNE) PlayStation 3 and Microsoft’s (NASDAQ:MSFT) Xbox 360 game consoles.

“Grand Theft Auto V builds on everything we’ve learned about open world game design,” said Sam Houser, Founder of Rockstar Games. “We can’t wait to share it with fans.”

According to Gamasutra, GTA is one of the most popular video game offerings of all time, selling more than 114 million copies since the first version was released in 1997. Sterne Agee analyst Arvind Bhatia predicts that the upcoming release may sell as many as 25 million copies in just its first year.

Conclusion

The video game industry is in a rough spot. The rise of apps on devices such as the Apple iPad (NASDAQ:AAPL) and social gaming on sites like Facebook (NASDAQ:FB) have impacted traditional gaming consoles. NPD Group, a market research firm, recently reported that software sales fell 18 percent to $497.4 million in September, compared to a year earlier. Furthermore, the lack of new gaming consoles is not helping to spur demand.

Based on the components of our CHEAT SHEET investing framework, Take-Two is a STAY AWAY for fundamental investors. Shares have declined 19.45 percent year-to-date, and competitors such as Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI) are also in red. Take-Two’s negative earnings and high debt to equity ratio also gives us reasons to remain cautious in the long-term.

On the positive, shares of Take-Two broke through its 50-day moving average in mid-August and has been using the moving average ever since as support. Stock charts are open for interpretation, but this is generally seen as a bullish development. Take-Two impressed shareholders with its latest earnings release, as the stock price jumped after the announcement, but only nimble traders willing to speculate should play the event.

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