Wednesday, December 12, 2012

Take-Two Interactive (NASDAQ:TTWO): Positive Holiday Themes Emerge & GTA Visibility Improves; Upgrade to OW - Piper

Piper Jaffray upgraded Take-Two Interactive (NASDAQ:TTWO) to Overweight from Neutral with a $18 price target (prev. $12) this morning.

According to the firm three factors lead to a more positive bias:

1) Strong 2012 Holiday Trends and Quality Theme Bode Well for Big Budget Titles in 2013. Three key industry themes have emerged this holiday. 1) Holiday is tracking better than expected. Concerns around social competition and/or console fatigue have proven overly conservative. 2) The top 5 holiday games as a group are growing. Long-tail titles are, in contrast, selling exponentially worse as game quality issues are magnified by negative reviews and social media. 3) The Xbox 360 and PS3 consoles continue to be relevant in 100 million households globally. This represents the largest active console installed base in video game history.

2) Powerful Portfolio of Titles. 2011's Modern Warfare 3 (ATVI) holds the record for biggest 5-day entertainment launch grossing $775 million globally. Piper notes they are confident that GTA V can approach and possibly break this record as their visibility around the title's technical scope and launch timing have improved. Despite being Street high, Piper's June qrtr non-GAAP revenue est. of $1b appears reasonable (Street’s $821m). TTWO's portfolio outside of GTA is the strongest it has ever been. Firm notes, NBA 2K & Borderlands 2 are exceeding estimates this holiday. They are, however, cautious around the 3/26/13 launch of Bioshock Infinite given timing and quality concerns.

3) TTWO shares have outperformed the market leading up to prior GTA launches.
Assuming a Jun-13 quarter launch, we are approximately 6 months away from GTA V shipment. Although past performance is not necessarily indicative of future performance, Piper notes that in the past 3 GTA launches, TTWO shares have materially outperformed the market in the 6 months prior to shipment. Specifically, TTWO shares appreciated, on average 32% in the 6 months prior to launch in the last 3 versions, while the NASDAQ was, on average, down - 14% during the same time periods. Outperformance for TTWO vs. the market was material and consistent in each of these 3 periods (see table below) and the least amount of relative outperformance was 32 percentage points.

Raising PT to $18 Based on 12x FY13/FY14 Avg EPS. Piper notes they had previously assigned TTWO a multiple that was discounted (8x) vs. their target multiple of 12x for EA & ATVI. Based on factors discussed in this note, they believe TTWO shares deserve a multiple that is in-line with comps in the space. Firm notes better performance of top 5 titles bodes well for the sell-through prospects of GTA V. They also note an improving portfolio of titles outside of GTA are helping to "smooth" the model.

Notablecalls:
This looks like a solid call that could work over the next several months. The last similar Gaming sector call we had was this:

Gamestop (NYSE:GME): Tactical opportunity as title and hardware drought breaks; up to Buy - Goldman Sachs

Worked out just fine.

It's been a while since I've seen a positive Game publisher call. Street high target and estimates too.

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