Today's Buy Opportunity: Take-Two Interactive

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Gaming is big business. Last year, U.S. consumers spent almost $20 billion on games and console systems like the Xbox 360, PlayStation 3, and Wii. This is nearly twice as much as they spent going out to the movies. Everyone from little kids to Kim Kardashian loves games. I find it interesting that even though the economy has been in a prolonged recession, people are still paying up for entertainment.

With all this cash being thrown around, is there a good buy right now in this industry? I think so. Read on.

Busted
Take-Two Interactive Software's (Nasdaq: TTWO  ) stock has been beaten down like a Liberty City thug. The trouble started with management's rejection of Electronic Arts' (Nasdaq: ERTS  ) $26-a-share offer to buy the company in 2008. That decision turned out to be a colossal blunder, with the stock collapsing soon thereafter and attracting the interest of activist investor Carl Icahn, whose firm Icahn Capital is now Take-Two's largest shareholder. For most of the past two years, Take-Two's stock has been hovering around $10, and I think the stock is a good buy at this price.

In the company's earnings release from last week, management raised guidance for its fiscal year ending Oct. 31. It now expects to break $1 billion in revenue and be profitable for the year. This would be only the second time in the past five years that Take-Two shows an annual profit, and I view it as a sign that the company is on the upswing.

Redemption
As industry leader Activision Blizzard (Nasdaq: ATVI  ) has proved with its renowned commitment to quality, a gaming company is only as good as the caliber of the games it makes. With a typical game carrying a $50 price tag, gamers are discerning and fickle consumers who will only pay for the best games. Many gaming companies have gone bust over the industry's three-decade history because of an inability to create games that gamers are willing to pay for.

Take-Two does not have that problem. It has some of the best creative talent in the industry and has shown an ability to create popular franchises. Its big hit of the year, Red Dead Redemption, has sold almost 7 million units since it hit shelves in May. That's a home run and a new franchise the company will be able to leverage for years.

No gaming company can rely on just one title, and Take-Two also boasts BioShock, Civilization, Max Payne, and, of course, flagship Grand Theft Auto among many other properties in its game portfolio. These are great and long-lasting brands that should continue to perform well for years to come.

The Foolish bottom line
While I like Take-Two at the current price, I do want to caution readers not to fall in love with video game stocks, including Take-Two. This is a feast-or-famine business model where companies need to keep coming up with hit titles year in and year out. Take-Two is a good buy here since the stock is out of favor and depressed. I think it's cheap given the progress it's made building out other game franchises. The ideal scenario for investors today would be for the company to report a few more good quarters, have the market start to like the stock again, and then get out with a nice profit. Alternatively, another acquisition offer would certainly be welcome.

What do you think of Take-Two's prospects? Let us know in the comments section below.

Previous recommendations:

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Charly Travers is an associate advisor with Motley Fool Hidden Gems and Motley Fool Million Dollar Portfolio, a real-money portfolio service. He owns no shares of companies mentioned here. Take-Two Interactive Software is a Motley Fool Rule Breakers selection. Activision Blizzard and Electronic Arts are Motley Fool Stock Advisor picks. The Fool owns shares of Activision Blizzard, on which Motley Fool Options has recommended a synthetic long position. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2010, at 2:03 PM, pj19 wrote:

    Don't forget they will be publishing Duke Nukem Forever! THE GAME THAT TOOK LONGER THAN WORLD WAR 2 TO DEVELOP!

  • Report this Comment On September 30, 2010, at 5:24 PM, cabincruser wrote:

    i have owned TTWO twice;^)

    i bought in '06 and sold a year later for a profit on the ERTS aquisition rumor ... before the news that TTWO didnt accept the offer and the price tanked , then i repurchased in late '09 near low at a much better cost basis.

    So today i read:

    2. Take-Two Interactive Software, Inc. (TTWO): Take-Two Interactive Software recently announced that it increased its guidance for 4Q10 and now expects revenue to be in the range of $270M to $320M (vs. a Reuters estimate of $240M). Non-GAAP earnings per share was guided between $0.20 to $0.30 (vs. a Reuters estimate of -$0.12). Carl Icahn (10% Owner) has been buying the stock aggressively over recent weeks .

    http://us.rd.yahoo.com/finance/external/pssa/SIG=131bj4g0l/*...

    •Icahn Piles Into Motorola, Take-Two and Hain

    http://us.rd.yahoo.com/finance/external/tsmfe/SIG=135mvuij1/...

    and the price has been on the rise again ..... all together now .

    http://www.youtube.com/watch?v=_sAKRpjmZj0

    Just sayin ' , cabincruser

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