It's easy to get fired up over "Grand Theft Auto V."
Take-Two Interactive Software, whose subsidiary Rockstar Games makes the action-adventure videogame, said Sept. 20 that the latest iteration of the franchise hit had generated more than $1 billion in sales during the first three days after its release.
Impressive, yes. And the game should boost sales and earnings at Take-Two this year. But even that big a hit doesn't make a stock a superstar.
That may not be immediately apparent. Take-Two's shares have risen 77% over the past 12 months. While quite the rise, it means that investors have already priced in success for the latest "Grand Theft" game. Cowen & Co. estimates 50% of first-year sales of "Grand Theft Auto V" occurred over those first three days, reflecting pent-up demand for the long-awaited title.
But beyond that, there isn't much clarity. Indeed, the stock has risen only 4% since the announcement of the $1 billion sales figure. More tellingly, Take-Two trades at just 9.8 times forward earnings. That compares with 14.6 times for peer Activision Blizzard and 18.8 times for Electronic Arts .
The big valuation discount reflects Take-Two's struggle to convince investors it can come up with sustainable revenue streams.
Of course, initial sales of "Grand Theft Auto V" were only for PlayStation 3 and Xbox 360 platforms. Take-Two is still expected to release a PC version of the game and may release new versions for coming next-generation consoles from Sony and Microsoft. International releases could also keep sales going.
And, on Tuesday, Take-Two launched an online version for buyers of the console game, which will allow users to pay for digital enhancements. These could potentially create a new sales channel.
Still, Take-Two makes it difficult for investors to forecast its performance more than one year out. Unlike competitors Activision and EA, which have a number of annual franchises and have already announced several major games for next year, the only title Take-Two reliably publishes every year is its NBA basketball game.
Little is known about what else is in the works. When Take-Two announced fiscal first-quarter results on July 30, Chief Executive Strauss Zelnick said only that it had "an extensive development pipeline" and expects to deliver adjusted profits in fiscal 2015 and for the foreseeable future.
The size of that profit could vary significantly, depending on which game Rockstar releases, according to Wedbush. For example, "Red Dead Redemption" sold over eight million units during its initial launch in 2010, while "Max Payne 3" sold only three million units during its initial launch in 2012.
New installments of blockbuster "Grand Theft" come out sporadically, with the last being more than five years ago. Activision releases a new "Call of Duty" every year.
Rockstar, whose games are favorites among fans because of their artistry and storytelling, may worry that holding developers to deadlines will damage the brand's cache. And after criticism surrounding previous game-release delays, Take-Two may be afraid of overpromising.
But the lack of clarity makes it risky to hold Take-Two stock long-term. For investors, the "Grand Theft Auto V" release may only underscore the company's continued exposure to an unpredictable game of chance.
Write to Miriam Gottfried at [email protected]
Take-Two Interactive Software, whose subsidiary Rockstar Games makes the action-adventure videogame, said Sept. 20 that the latest iteration of the franchise hit had generated more than $1 billion in sales during the first three days after its release.
Impressive, yes. And the game should boost sales and earnings at Take-Two this year. But even that big a hit doesn't make a stock a superstar.
That may not be immediately apparent. Take-Two's shares have risen 77% over the past 12 months. While quite the rise, it means that investors have already priced in success for the latest "Grand Theft" game. Cowen & Co. estimates 50% of first-year sales of "Grand Theft Auto V" occurred over those first three days, reflecting pent-up demand for the long-awaited title.
But beyond that, there isn't much clarity. Indeed, the stock has risen only 4% since the announcement of the $1 billion sales figure. More tellingly, Take-Two trades at just 9.8 times forward earnings. That compares with 14.6 times for peer Activision Blizzard and 18.8 times for Electronic Arts .
The big valuation discount reflects Take-Two's struggle to convince investors it can come up with sustainable revenue streams.
Of course, initial sales of "Grand Theft Auto V" were only for PlayStation 3 and Xbox 360 platforms. Take-Two is still expected to release a PC version of the game and may release new versions for coming next-generation consoles from Sony and Microsoft. International releases could also keep sales going.
And, on Tuesday, Take-Two launched an online version for buyers of the console game, which will allow users to pay for digital enhancements. These could potentially create a new sales channel.
Still, Take-Two makes it difficult for investors to forecast its performance more than one year out. Unlike competitors Activision and EA, which have a number of annual franchises and have already announced several major games for next year, the only title Take-Two reliably publishes every year is its NBA basketball game.
Little is known about what else is in the works. When Take-Two announced fiscal first-quarter results on July 30, Chief Executive Strauss Zelnick said only that it had "an extensive development pipeline" and expects to deliver adjusted profits in fiscal 2015 and for the foreseeable future.
The size of that profit could vary significantly, depending on which game Rockstar releases, according to Wedbush. For example, "Red Dead Redemption" sold over eight million units during its initial launch in 2010, while "Max Payne 3" sold only three million units during its initial launch in 2012.
New installments of blockbuster "Grand Theft" come out sporadically, with the last being more than five years ago. Activision releases a new "Call of Duty" every year.
Rockstar, whose games are favorites among fans because of their artistry and storytelling, may worry that holding developers to deadlines will damage the brand's cache. And after criticism surrounding previous game-release delays, Take-Two may be afraid of overpromising.
But the lack of clarity makes it risky to hold Take-Two stock long-term. For investors, the "Grand Theft Auto V" release may only underscore the company's continued exposure to an unpredictable game of chance.
Write to Miriam Gottfried at [email protected]