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Take-Two Interactive - Thoughts From Fifth and Dover

September 12, 2010 | About:

Because we are simple working people without three-piece suits or graduate degrees in finance, and because we also think that pre-popped freeze dried popcorn would be a poor idea, we get quite a bit of e-mail during the course of any given week asking us our thoughts on specific companies.

The overwhelming requests are from clients that read something positive about a company on an investing website. This week was no exception.

It seems that a website recommended buying game manufacturer Take-Two Interactive Software, Inc. (Nasdaq: TTWO). This recommendation prompted a number of e-mails to us all wanting to know if investments in Activision Blizzard, Inc. (Nasdaq: ATVI) or Electronic Arts, Inc. (Nasdaq: ERTS) should be sold.

Alas, we simply do not recommend the buying or selling of securities, mainly because we are not qualified to peform that sort of investment function but more importantly because that is simply not the business we engage in.

What we do suggest and have always suggested, is that before an investment is undertaken the reason for the investment is fully considered.

Several of the questions we suggest investors asked themselves before they invest are:

1.What is it that you expect an investment in this company to do for you?

2.When will you need the money from an investment in this company?

3.What is your estimate of the value of what you are buying?

4.What is your capitulation point should the investment not work out?

5.Does your spouse or significant think this is a good investment?

As we said, we do not recommend the buying or selling of securities. Instead, we try and provide a basis for those parties interested in a particular security to further their own research.


Financial information related to Take-Two Interactive Software, Inc. contained in this report, is based on the company's most recent SEC 10-K filing for year ending October 31, 2009, as filed with the Securities and Exchange Commission on December 18, 2009.

What They Do

The company is a global publisher, developer and distributor of interactive entertainment software, hardware and accessories. The company’s publishing business consists of Rockstar Games, 2K Games, 2K Sports and 2K Play publishing labels.

The company develops, markets and publishes software titles for gaming and entertainment hardware platforms, including Sony’s PLAYSTATION3 (PS3) and PlayStation2 (PS2) computer entertainment systems; Sony’s PSP (PlayStationPortable) (PSP) system; Microsoft’s Xbox 360 (Xbox 360) video game and entertainment system; Nintendo’s Wii (Wii) and DS (DS) systems, and for the personal computers (PC) and Games for Windows.

The company also develops and publishes titles for digital distribution via Sony's PlayStationNetwork (PSN) and Microsoft's Xbox LIVE Marketplace (Xbox LIVE) and Xbox LIVE Arcade (XBLA), as well as digitally offers its PC titles through online download stores and services, such as Steam.

The company has also begun to develop and publish titles for the iPhone and iPod touch. In March 2010, SYNNEX Corporation acquired substantially all of the North American assets of Jack of All Games, Inc., a distributor of video game hardware and software in North America, and a wholly owned subsidiary of Take-Two Interactive Software, Inc.

Short-Term Investment

The stock closed recently at $9.57 with resistance at $9.89, a 3% increase from its recent close and support at $9.39, a 2% decline from its recent close.

The shorter term trend for the stock is down, with the Stochastic currently moving from Overbought to Oversold, telling us, at least at this time, a short-term investment is not in our best interest.

Long-Term ( 5 Year Hold) Investment

The company's current fiscal year ends next month, and while we did take a look at their last several quarters, we focused mainly on their FY09 financial data, since it is the most current audited financial information.

What we found was simply unimpressive. Goodwill and Intangibles make up more than 30% of Total Assets, which changes the company's $6.18 Book Value to $2.28 when these two items are backed out of Total Assets.

In addition, we feel the company simply has to much Debt relative to Sales and note that in such a tough economic environment, servicing their debt, may become harder to do, especially since long-term debt increased for FY09 by almost $90 million.

We were also not overly impressed with the company's FY09 Free Cash Flow of $0.08 per share. It just seems to us that with the company's published titles, Free Cash Flow should be considerably higher and caution investors to pay close attention to this metric going forward.


Based on our review of the company's FY09 financial information, our Reasonable Value Estimate for this stock is between $12 and $15.

To many investors, the stock will appear attractive since it is currently trading at about 2 times Book Value.

However the stock is also trading at 124 times FY09 Free Cash Flow, with a Trailing Twelve Month PE of 126. Not exactly what we consider cheap.

Market Advantage

Based on our valuation work for this stock, we believe that the odds of reaching our Reasonable Value Target are currently 8 to 1 against the investor.

Final Thoughts

Investment decisions should never be made in a vacuum. All reasonable care should be given to what a particular investment is intended to do for your portfolio.

The same is true of stock recommendations. Many stock recommendations are made with the best of intentions and come from websites operated with the highest of integrity.

But make no mistake. All of them, including our own little blog site, are there to make money. Free stock recommendations offered by many sites are only enticements, intended to get the reader to click on a link or subscribe to a newsletter that automatically renews year after year.

So instead of worrying about the recommendations of a website, we think investors should spend their time worrying about the type of shoes a mosquito might wear will driving to Tipperary, since to us driving mosquitoes and website stock recommendations are are one in the same.



To download the free Wax Ink Take-Two worksheet, please click here.

About the author:

Wax Ink is a baseline equity research company not licensed or registered with any government agency

Visit wax's Website

Rating: 3.0/5 (9 votes)


Batbeer2 premium member - 7 years ago
Thanks for the article.

4.What is your capitulation point should the investment not work out?

Care to expand ? I do not understand what you mean with capitulation in the context of investing. Also, how yo you define "not working out".

The capitulation point I know of in the context of investing is the point where 99% of all investors give up. March 2009 would be an example for the market in general. IMHO last month was the capitulation point for the bulls on for-profit education.

Wax - 7 years ago    Report SPAM

I used the term capitulation point in the same context as you understood it. In other words at one point to you say this is a bad investment, cut your losses and get out of the stock?

As to for-profit education, I think you are spot in with that. Many investors however won't see it that way. Instead they will ride their investments in those sorts of companies down until they have little to no profit left in them.

Batbeer2 premium member - 7 years ago
Thanks for the response.

We agree then on what a capitulation point is; however, we may not agree on the preferred action.

For every stock in my portfolio I have a thesis. If I find the thesis is no longer valid, I sell. This can be caused by the stock going up or me finding some (new or old) information that invalidates my thesis. My thesis does not usually depend on macro economic developments.

I can not imagine selling because the stock has gone down.

Oh...... and I sometimes (rarely) sell something cheap to buy something ridiculously cheap. I use the 100% rule. I will sell something that trades at 66% of my estimate of IV to buy something that I believe is trading at 33%. The latter has to rise 100% to come abreast with the former.....

Hence the 100% rule.
Wax - 7 years ago    Report SPAM

Cool rule...nice easy concept.

Certainly there are times when we feel as if we have made a mistake with and investment. But most of the time the feeling is brought on by a macro economic event. So like you, we pay little to no attention to most of that sort of noise...sort of.

While we don't have a thesis on each stock, we do determine a value for each stock, a value that we have learned over the years needs to include earnings, but does not have earnings as the focal point of the valuation. This is contrary in many ways to the vast majority of value investors.

Once we have a valuation determined, including a buy price, we wait until the buy price is reached, as was the case with the macro economic events of late 2008, and then we buy.

Selling is pretty easy. When the price of the stock reaches or exceeds our valuation, we sell.

Thanx for the great comments.


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