Take-Two's no "one-hit wonder," says Wedbush Morgan analyst Michael Pachter, who says the real reason the publisher loses money in non-GTA years is the over-ambitiousness that leads to title delays.
Analysts and investors' biggest reservation about publisher Take-Two is its inconsistency -- specifically, whether the publisher can be profitable in a year that it doesn't release a Grand Theft Auto game. Just yesterday, the publisher warned its investors of poorer-than-expected financial performance and a reduction in its forecast for the year, citing underperformance of its holiday games and Major League Baseball franchise. But the company is no "one-hit wonder," says Wedbush Morgan analyst Michael Pachter. In fact, he says, the company "has at least eight bona fide franchises, with the potential for 10 or 12." Take-Two's problem, according to the analyst, is that it aims too high. "While making solid decisions about greenlighting games, we believe that management has been overly ambitious about the company’s development schedule," says Pachter, who criticizes the company for "unpredictable" release dates and the way its high quality standards routinely force it to delay major games, as it's done with BioShock 2 and Max Payne 3. Investors would also be justified in having reservations about the lack of visibility on the key GTA franchise, says Pachter, who suggests Take-Two would benefit from more predictability on when new GTA games will launch. Grand Theft Auto IV took 3 1/2 years to develop, and a new version hasn't even been announced yet, the analyst points out. "Dan Houser, one of the three key employees behind the franchise (along with brother Sam and producer Les Benzies) said in a recent interview that the trio hadn’t even thought of the locale for the next installment, let alone the plot," he says. "While we find this unfathomable, if it is true, it suggests that there will not be another installment of GTA until late 2011 at the earliest, putting the game on a 3 ½ year release cycle," adds the analyst. "We think that the lack of visibility around the GTA franchise is an impediment to attracting investors to the Take-Two story, and reflects poorly on management. In our view, if the company’s most important franchise is on a 3½ year schedule, management owes its shareholders the obligation of informing them of this fact." Finally, as Pachter notes, Take-Two's lineup is "quite impressive" -- and yet company management has said may not be able to profit on $1.2 billion in revenue. "We think that this is probably true, and wonder when the company expects to have a sufficiently deep lineup to permit revenue growth to a profitable level without an installment of GTA," he says. The analyst estimates Take-Two could turn a profit if it were able to sell 12 million units of its new franchises -- but says it's "unlikely" that can happen, and that with its current release pattern, investors can continue to expect Take-Two to lose money in non-GTA years. "Of course, if Take-Two can deliver its franchises on a more compressed schedule, its earnings power would essentially double, and the stock would command a much higher price," he says.
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