Despite concerns about Take-Two's pricey Rockstar retention deal and doubts about the strength of the company's upcoming fiscal year, Wedbush Morgan analyst Michael Pachter is upgrading his rating of Take-Two from Hold to Buy.
Pachter feels the company's being sufficiently cautious about the economic climate and its earnings potential, and even without a numbered Grand Theft Auto in the coming year, its performance is likely to improve.
"Take-Two largely remains a one-hit wonder," Pachter says -- but far from being necessarily a negative, that affords the company some stability, he asserts. "The company's one hit, Grand Theft Auto, is relatively predictable and immensely profitable."
The crucial nature of GTA and its power as an earnings juggernaut is another reason the profit-sharing deal with developer Rockstar is overall a benefit, according to Pachter, even though the transfer of wealth might put a damper on earnings growth for Take-Two as a whole.
"In our view, the next iteration of GTA is likely to outsell the prior version by 50 percent," Pachter opines. His reasoning? When GTA IV came out in April 2008, it penetrated 40 percent of the overall console install base with its 12 million units sold.
Assuming the next Grand Theft Auto comes out in 2010, the overall install base of home consoles is expected to have doubled, from 30 million at the time of GTA IV's launch to 60 million.
"We don't think it is reasonable to estimate that sales of [the next] GTA will double the prior version, but we think that a 25 - 30% penetration is reasonable, suggesting 15 - 18 million units sold," says Pachter. "That means that Take-Two's profits from the next iteration should be approximately 50 percent greater than from the last version."