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Take-Two Entering New Peak Product Cycle

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Company delivered "okay" quarter, but the focus should be longer-term

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Yesterday, after the close, Take-Two (TTWO) reported an okay quarter, delivered okay guidance, and held an okay conference call. The stock is bouncing this morning, which may be surprising to some because it rallied about 25% since the July 14 announcement that BioShock 2 would be delayed. For more on TTWO's earnings, see Take Two Takes a Hit.

My reaction? I bought more.

Video-game companies are highly cyclical -- not all that different from a Caterpillar (CAT) or a Boeing (BA). The difference is that a video-game company's product cycles rise, peak, and die a heck of a lot faster. Take-Two is now emerging from a cyclical trough and is about to start a new one that will dwarf the last.

Take-Two just exited a quarter losing $55.5 million on a 68% decline in revenues. And Microsoft (MSFT) and Sony (SNE) recently announced price cuts for their Xbox 360 and PlayStation 3 consoles, respectively, setting the stage for a new leg of growth in their installed bases. That's good news for Take-Two, whose flagship Grand Theft Auto and BioShock franchises focus on those machines.

On October 29, Take-Two will release a downloadable expansion to Grand Theft Auto IV entitled The Ballad of Gay Tony, the trailer for which was just released yesterday. It's already generating massive buzz for the game, which at $19.99 is priced right for the recession. Take-Two will also release a $39.99 game disk which will include both Gay Tony and the previous Grand Theft Auto IV expansion, The Lost and the Damned.

Next year, we'll see Bioshock 2, sequel to the 2007 blockbuster and a guaranteed multi-million unit seller. Take-Two will also release Mafia 2 and Max Payne 3, updates in two highly-successful franchises.

And at some point in the late 2010 to 2011 time frame, Grand Theft Auto V should emerge from the shadows to excite gamers and investors. The Xbox 360/PS3 console cycle installed base will be significantly larger because of price cuts, setting the stage for Grand Theft Auto V to sell 20 million copies or more worldwide. We're talking at least a billion dollars in revenue from this high-margin property in the first year alone -- and judging by the ongoing success of Grand Theft Auto IV, tons and tons of downloadable content and catalog sales after that.

Within the context of my relatively concentrated equity portfolio, Take-Two is one of my biggest long positions and will likely end up being bigger. The Disney (DIS)-Marvel (MVL) deal is a reminder that content is king. Well, Take-Two has amazing content that's about to unleashed.

Gay Tony's just the start.
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Position in TTWO.
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