Sunday, January 29, 2006

TTWO: Video Gamer Could See $8

Continued retail weakness for video game software has sent shares of Take Two Interactive (TTWO) straight down the toilet.

You will recall how on January 11, we raised our eyebrow at the single franchise company, which is now roiling from a management change and lower than expected sales:

.... Major game publishers had a rocky 2005 due to an industry-wide hardware transition, lacklustre title releases, and sharply lower consumer spending.

Take-Two's value is largely defined by the Grand Theft Auto franchise -- no accident, then, that 20% of Take Two's freely traded shares are sold short.

If only insiders would spend less time dumping shares and more time getting the company's value propostion together, TTWO might have a chance. Until then, this is the sort of stock that could leave you crying in your beer.

Since then, shares of TTWO have tumbled 25%. Our skepticism was warranted. As of today, we're reiterating our sell recommendation, as well as lowering our price target to $8.

Over the weekend, Banc of America issued a grim note in which they cited:

damaging near-term, intermediate-term and longer-term risks...potential SEC investigations, and potential accounting restatements. Meanwhile, the company is burning cash at an alarming rate, and we think cash levels will approach $75 million by spring. We expect more title delays, key employee departures and corporate governance issues.

Long-term risks include overdependence on one brand and an unprofitable diversification strategy. We think the company runs the risk of degrading its Grand Theft Auto (GTA) franchise by porting GTA: Liberty City Stories to the PlayStation 2 just five or six months after its release on the PlayStation Portable. We believe a formal SEC investigation is an increasingly real possibility supported by the company's inability to file its 10-K annual report and insider sales.

We believe that Take Two's shares will see much more pain.

Potenially cannibalized/sluggish sales, further management erosion, and a staid gaming environment all spell one thing for Take Two: a mess bloodier than its games.

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