Game On for Take-Two

Take-Two Interactive (Nasdaq: TTWO  ) turned last year's profit into an even bigger than expected third-quarter loss, lowered the optimistic end of its fiscal 2004 earnings guidance, and offered what some might see as disappointing earnings guidance for fiscal 2005. So why is it that the stock is up 5% today?

Because gamers actually like the games that Take-Two publishes and distributes.

You see, most gamers aren't privy to the earnings restatements or Securities and Exchange Commission investigations that have plagued Take-Two. And even if they are, they mostly don't care. What gamers do know is that you can hop over to the local Best Buy (NYSE: BBY  ) or Electronics Boutique (Nasdaq: ELBO  ) and pick up a copy of Take-Two and Sega's A-plus rated, Madden-challenging ESPN NFL 2K5 -- as well as the rest of Sega's hit new sports lineup for the lead Sony (NYSE: SNE  ) PlayStation 2 and Microsoft (Nasdaq: MSFT  ) Xbox -- for just $20.

Gamers also know that Grand Theft Auto: San Andreas -- the sequel to Vice City, the best-selling game ever, as well as the inspiration for Activision's (Nasdaq: ATVI  ) smash hit True Crime -- will be released Oct. 29. Street racer Midnight Club 3: Dub Edition will also make a splash this holiday season.

So sure, Take-Two lost $14.4 million, or $0.32 per share, in the third quarter, more than the $0.30 per share analysts expected it to lose. The company also narrowed its fiscal 2004 earnings forecast to $1.60 to $1.62 from its previous guidance of $1.60 to $1.65 per share. For fiscal 2005, Take-Two's first-quarter guidance of $1.00 to $1.10 in earnings is short of the analyst expectation of $1.19 per share, and the full-year earnings forecast of $2.00 to $2.20 is lower than the $2.26 analyst estimate.

But the revenue figures are way more impressive.

Take-Two's $160.9 million in third-quarter revenue -- buoyed by sales of ESPN NFL 2K5 -- blew away the analyst projection of $137.2 million. The company expects first-quarter revenues to clock in at $420 million to $460 million, and fiscal year 2005 revenues of $1.2 billion to $1.3 billion. The current analyst projection is for revenues of $431.7 million and $1.21 billion, respectively.

You should recognize that while Sega's value-priced sports games account for a considerable portion of Take-Two's sales boost -- ESPN NFL 2K5 made up 13% of the company's third-quarter sales -- the gains are coming at lower margins. But the point is this: There may be a few kinks, but nothing that can't be fixed. The profit figure may disappoint now, but a continuation in revenue strength will serve as evidence that Take-Two is a relevant player in this business, and may be worthy of investment consideration at 15 to 16 times 2005 earnings.

For more Foolish analysis on Take-Two, click to:

Fool contributor Jeff Hwang owns none of the companies mentioned above.

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