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Before the market open on Wednesday, Take-Two (NASDAQ:TTWO) announced that BioShock Infinite’s release date had been delayed by roughly four months to February 26, 2013 (Q4:13) from October 16, 2012 (Q3:13). Ken Levine, Creative Director of Irrational Games, the studio developing BioShock Infinite, attributed the delay to maximizing game quality.
In our view, the delay opens the window for Grand Theft Auto V to be released in October 2012 (Q3:13). We believe that October is the preferred release month for GTA V’s developer, Rockstar Games, as the studio has scheduled every prior GTA releases during that month (with GTA IV delayed to April 2008, due to bugs in the PS3 version). We speculate that once Rockstar Games notified Take-Two that GTA V would be ready by October, Take-Two gave Irrational Games the option to spend more time fine-tuning BioShock Infinite. Although we were confident that both games would sell millions of units when it appeared that they would be released in close proximity, we think that the delay will alleviate any wallet-share concerns and ensure that both games receive the undivided attention of Take-Two’s management and marketing teams, and will ensure that retail support is optimized.
Take-Two did not update its prior FY:13 guidance for earnings in excess of $2.00. The company has a history of providing conservative guidance, and we are skeptical that it can achieve FY:13 earnings guidance of over $2.00 without a GTA game. The delay of BioShock Infinite is likely to result in a shift of around $0.20/share in earnings out of FY:13 and into FY:14, making the $2.00 figure even less likely to be achieved, and we would expect management to update guidance if the delay put that guidance at risk. However, we expect the next GTA to sell at least 18 million units, representing less than a 20% attach rate to the 2012 year-end installed base of PS3s and Xbox 360s in the U.S. and Europe. At this level, we estimate that GTA will generate at least $2.65/share in incremental EPS, making the $2.00 guidance easily attainable, even with the BioShock Infinite delay. Should the game sell 24 million units (in line with its historical attach rate), we expect a contribution of more than $4.00 per share in incremental EPS.
We expect an update on GTA V release timing as early as May 22, when the company provides its Q4:12 results, or by E3, scheduled for June 5-7 in Los Angeles. If there is no update on either date, we believe it is unlikely that GTA V will launch this calendar year.
Commitment to producing high-quality games should translate into consistent profits starting in FY:13. Of the major publishers, Take-Two has had the fewest “misses” in terms of game quality over the last two years. FY:13 should be one of the strongest years in the company’s history, due to the releases of BioShock Infinite, Borderlands 2, GTA V, Max Payne 3, Spec Ops: The Line, and two XCOM games. These games should allow the company to show substantial revenue growth and exceed $2.00 in EPS next year, as it has guided.
Maintaining our OUTPERFORM rating and our 12-month price target of $19, which reflects a forward multiple of 15x estimated sustainable EPS of $1.20 (fully taxed) plus an estimated $1/share in net cash. Our multiple is in line with the company’s historical range, and reflects improving execution.
Risks to attainment of our share price target include performance of the company’s games, levels of competition, changing macroeconomic factors, changes in consumer demand for video game hardware, and the ability of the company to attract merger partners.
Michael Pachter is an analyst at Wedbush Morgan.
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