Novice Investing - Taking Grand Theft Auto Seriously

Date: Tuesday 13th 2008f May 2008 02:49:41 PM

Taking Grand Theft Auto Seriously - 05/08/2008

By: Hari Wibowo

A ray of good news are hitting Take Two Interactive Software Inc. (TTWO). Take Two's highly anticipated Grand Theft Auto IV tops $ 500 Million in sales for the first week of its release. It is selling more than 6 million units world wide, thus bringing the price per unit at $ 85. Take Two shares, which had received a buyout price of $ 26 from Electronic Arts Inc. (ERTS), barely moved. In the past, Take Two management has refused the buyout offer from Electronic Arts, citing its preference to wait for Grand Theft Auto IV's performance. Is it worth the wait? Let's look at it briefly.

While raking $ 500 Million sales in the first week is an impressive feat, sales of big game franchise such as Grand Theft Auto may taper off sharply after a while. One analyst estimate that Take Two will sell 12 million copies by the end of 2008, giving Grand Theft Auto an annual revenue of $ 1.02 Billion. In fiscal 2007, Take Two garnered a revenue of $ 981 Million. Assuming the rest of the franchise is intact, Take Two is on track to produce revenue of $ 2.0 Billion for 2008. The $ 1.02 Billion of additional sales from Grand Theft Auto would result in $ 244 Million of pretax profit if history is any guide.

Now, we believe that sales of Grand Theft Auto will peak somewhere in 2008 or 2009 which means that we can expect a higher valuation for Take Two during these two years. For fiscal year 2007, Take Two was incurring a loss of $ 138.41 Million. With an additional of $ 244 Million from Grand Theft Auto, we would expect Take Two to report $ 106.4 Million of pre tax profit or $ 69 Million in net income.

The take over price from Electronic Arts is $ 2 Billion. With expected net income of $ 69 Million, Electronic Arts is offering 29 times of peak earnings, which is quite generous. It is no wonder Take Two's shares didn't move after the announcement of its Grand Theft Auto sales this week. Anyhow, Take Two shares were trading at $ 15 per share before the announced $ 26 per share take over price. This is already a rich 73% premium for Take Two shares. Unless Take Two's other game franchises can show significant improvement, we do not expect Take Two shares to move significantly higher than its current $ 26 per share level.

END

Have questions or want to comment on this article? Proceed here

Distributing your own investing content is easy. Simply, click here.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Take Two Interactive Software Inc. (TTWO) or any other securities.

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]