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Wedbush Downgrades Take-Two, Despite GTA Upside
by Jason Dobson
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February 16, 2007
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Wedbush Morgan's Michael Pachter has issued a research note to investors downgrading shares of Take Two from a rating of 'hold' to 'sell', noting that while the company likes the publisher's games, Wedbush is “not optimistic about its profit potential.”
Explains Pachter, “We think that Take-Two’s flagship franchise, Grand Theft Auto, will continue to generate significant profits, but are less optimistic about the profit potential from its sports business and from 'everything else'.”
The company has established a 12-month target price for shares of Take Two of $15, though as of this morning company's shares were trading at a higher value of $20.01. The downgrade will undoubtedly be unexpected to some, considering the number of high profile titles announced by Take Two for release in 2007 from outside the GTA canon, including Irrational Games' Bioshock for the PC and Xbox 360, as well as the recently announced Manhunt 2 for the PSP, PlayStation 2, and Wii.
As stated, Wedbush recognizes the earning potential of Take Two's Grand Theft Auto franchise, with Pachter commenting, “We believe that the GTA franchise has the potential to generate at least $600 million in revenues each time that an installment is released.”
However, he balances this optimism by illustrating two factors that he believes could limit the revenue potential of the franchise over the next several years - a slow growing installed base for the Xbox 360 and PlayStation 3, coupled with significant market share captured by Nintendo's Wii, a console for which GTA does not yet exist, nor has been announced.
“We expect only modest results for Grand Theft Auto IV when it launches this fall,” writes the analyst. “Although we expect demand to be high, we think that the addressable market will be quite small, with only approximately 13 – 14 million Xbox 360 owners at launch and only around 5–6 million PS3 owners in the U.S. and Europe.”
He adds: “GTA IV may attach at a slower rate than many anticipate, given that it is expected to launch in the same window as Halo 3 on the Xbox 360. It is arguable that GTA IV will be a better game than Halo 3, but in our view, Xbox 360 owners who choose to buy only one of the two games at launch will opt to buy Halo 3 first, because of its well developed online game play and fiercely loyal fan base. Thus, the attach rate early on may disappoint many investors.”
Looking to other franchises, Pachter also cites “uneven results” from the publisher's sports franchises, and comments that “[Take Two] has embarked on the wrong strategy in its attempts to diversify away from its Grand Theft Auto revenue base. It has consistently gambled on money-losing games in its effort to diversify, and made a huge bet when it embarked on its sports strategy.”
The company has announced plans to release an unlicensed football title in 2007 titled All-Pro Football 2K8, though Wedbush feels that its impact on the overall sports game market will be negligible in the face of continued competition from Electronic Arts.
Concluding, the investor writes: “We think that Take-Two has lost its way. We do not think that its obstacles are insurmountable, but in the absence of periodic financial statements, company guidance, release schedules, and regular interaction with investors, we are unable to adequately measure the company’s progress in turning things around."
"Should Take-Two demonstrate greater than expected progress in its cost control efforts, in its game selection, or in delivering profits from its sports business, we will revisit our estimates and rating. In the interim, we advise investors to sell shares of Take-Two," adds Pachter.
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