Fellow billionaire Carl Icahn has been moving back into Take-Two Interactive Software, Inc., with a recent filing disclosing a position of 8.7 million shares (read more about Icahn’s interest in Take-Two). Glenview Capital, a hedge fund managed by former Omega Advisors trader Larry Robbins (check out his favorite stocks), owned 7.2 million shares at the end of the third quarter of 2012. See our analysis of hedge fund activity in video game companies.
Sales were up strongly in the third quarter of 2011 from a year earlier, but due to the nature of the video game business that’s not particularly meaningful; new product releases can cause sharp spikes in revenue. In the six months ending in September (Take-Two’s fiscal year ends in March), revenue was up 13% from the comparable period in the previous fiscal year though net losses more than doubled. Analyst expectations for the next fiscal year (ending in March 2014) imply a forward P/E of 5, likely because Take-Two currently has Grand Theft Auto V in development. While the company has not set a release date, it appears likely that the game will be released in that fiscal year and drive abnormally high earnings. We’d also note that while a number of hedge funds are bullish on the stock, quite a few traders think that Take-Two is overvalued: the most recent data shows that 28% of the outstanding shares are held short.
Other game companies include Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI). Both of these stocks carry forward P/Es of 11, though as larger companies (EA is the smaller of the two at a market capitalization of $4.3 billion) their earnings are likely more regular particularly year over year. This, along with the fact that Activision Blizzard is solidly profitable on a trailing basis as well (it is valued at 14 times trailing earnings) explains why they are priced at a premium to Take-Two. Short interest at these two stocks is considerably lower as well, with less than 10% of the outstanding shares held short in each case. Activision Blizzard in particular seems like a safer stock than Take-Two.
We can also compare Take-Two to social games developer Zynga Inc (NASDAQ:ZNGA), and to Microsoft Corporation (NASDAQ:MSFT) which of course has other business operations but is tied to the video game industry through its own development studio as well as its role as the provider of the Xbox gaming system. Zynga is struggling to be profitable at all, and most of its current valuation is its cash hoard as gaming appears to be in decline on platforms such as Facebook. Microsoft’s earnings multiples are also tricky as there will likely be a spike in business as new versions of Windows and Office are released. The forward P/E is 8, but it’s unclear how well Windows 8 will be received and if Microsoft will manage to meet analyst expectations. We think it’s best to wait for more information on that front.
New products could well pull Take-Two into the black in the next fiscal year, but that profitability might not be very sustainable and certainly as things stand the company is a tough sell to a value investor. It might be wiser to look more closely at Activision Blizzard if an investor feels that the video game industry in general is poised for a comeback.
