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Take-Two Rally May Have Only Just Begun

Take-Two Interactive shares rallied on the first official mention of the forthcoming Grand Theft Auto V video game after the previous version pulled in more than $500 million in sales in the first week of its release to make it the highest-selling video game at the time.

It may be only the beginning of gains for investors — at least until the title goes on sale. After all, this isn't the first time Take-Two's stock has jumped on GTA V chatter. In April, after GameStop's German Web site first listed the video game for release in early 2012, Take-Two shares spiked higher. Today's mention of the game on Take-Two's Twitter account is the first time the company itself has officially spoke of the game.

Grand Theft Auto IV
Source: Take Two Interactive Software
Grand Theft Auto IV

After Take-Two promised that a video preview of the game will be released Nov. 2, the shares jumped — recently up 7.5 percent to $15.46, not far from a 52-week high of $17.58. With no release date for the game divulged by Take-Two yet, this could very well be the start of the stock's run higher, not the end of a speculative rally.

For investors and those savvy on Wall Street, this is a solid case study in buy the rumor, sell the news. A hedge fund analyst, who wished to remain nameless, told me today that Take-Two shares rise, on average, over the 12 months into a major video game title's release.

I did some data mining, and it turns out he's right. Grand Theft Auto IV's release in North America on April 29, 2008, was preceded by a 34 percent increase in Take-Two's shares. Recent hit Red Dead Redemption was released on May 18, 2010, in the U.S., and Take-Two shares ran up 25 percent beforehand. Shares jumped 20 percent in the 12 months leading up to the release of BioShock 2 on Feb. 9, 2010.

The hedge fund analyst said that the official announcement of GTA V allows sell-side analysts to properly model the revenue Take-Two could see from the release of what will no doubt be a blockbuster game launch. Currently, analysts expect Take-Two to earn 18 cents a share in fiscal 2012 and a whopping $2.36 a share in fiscal 2013, which will presumably be the year for GTA V's release.

During fiscal 2008, which was the year of the last major Grand Theft Auto title release, Take-Two Interactive booked revenue of $1.53 billion and earnings of $1.28 a share. Analysts may change their ratings if they could depend on a fiscal 2013 release of the next installment in the series. Currently, seven analysts say Take-Two is a "buy," another seven recommend holding the stock, and two analysts say investors should sell shares.

Investors are already starting to see sell-side analysts perk up on the GTA V teaser. Bank of America/Merrill Lynch research analyst Justin Post said the public confirmation is positive for the stock and it increases his confidence in fiscal 2013 earnings guidance above $2 a share.

"For FY13 we estimate non-GAAP EPS of $2.08, which assumes a new GTA title comes in [the second half] with close to 15 million units at launch," Post writes in a research note today. He adds that his estimate could be conservative given growth in the console base since the last release, and that each 1 million units shipped represents 15 cents to 20 cents in EPS upside.

Post maintained a "buy" rating on Take-Two with an $18 price target, calling the stock his "top idea" in the sector. He notes that Take-Two shares traded at 13 to 20 times earnings per share in the two prior Grand Theft Auto releases.

Arvind Bhatia, an analyst at Sterne Agee, is similarly bullish on Take-Two, saying he believes the next Grand Theft Auto title could sell as many as 20 million to 25 million units, even though his model calls for only 17 million units. While his current estimate for fiscal 2013 earnings stands at $2.50 a share, he says the higher game shipments could push earnings to between $3 and $4 a share. Bhatia has a "buy" rating and $21 price target on the stock.

Not every analyst who follows Take-Two is as enamored with the idea of stealing more cars and shooting more innocent civilians. Piper Jaffray's Michael Olson says that while the anticipation of GTA V will be significant over the next several quarters, he worries about what the future holds for Take-Two if Rockstar Games, the developer of the series, were to move to a different publisher.

"Investor attention may slowly focus on what lies beyond GTA V, which we believe leads to a number of uncertainties regarding the long-term Take-Two story," Olson says, adding that the Street has already started baking GTA V into fiscal 2013 estimates in his view. Olson rates Take-Two "neutral" with a $12 price target.

The hedge fund analyst, on the other hand, says he believes earnings estimates could top $4 a share for fiscal 2013, which would continue the trend of Take-Two's share price running up into a major video-game launch. What happens after the GTA V launch, though, remains to be seen.

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