Small Game Developer Set to Generate Short-Term Gains

There’s some buzz surrounding the video gaming market again with the pending releases of the “PlayStation 4” by Sony Corporation (NYSE/SNE) and the “Xbox One” by Microsoft Corporation (NASDAQ/MSFT).

As I recently discussed, the release of new gaming and entertainment consoles generate excitement and drive up the demand for games. (Read “Why the Gaming Sector Should Be on Your Radar.”) In this column, I wrote about Electronic Arts Inc. (NASDAQ/EA) and Activision Blizzard, Inc. (NASDAQ/ATVI), but a much smaller gaming software maker that I expect could deliver some impressive numbers, based on my stock analysis, is Take-Two Interactive Software, Inc. (NASDAQ/TTWO).

If you are a fan of the infamous “Grand Theft Auto” series, you also probably know that the creator is Take-Two Interactive. The recent launch of its latest version, “Grand Theft Auto V,” is breaking all records for the series, as the company said it has already sold 29 million copies in the first six weeks of sales. That’s impressive and will generate well over $1.5 billion in revenues, which is more than the company’s trailing 12 months of sales, according to my stock analysis.

In addition to Grand Theft Auto, Take-Two Interactive publishes games under two labels: Rockstar Games and 2K. The 2K label publishes under three more labels: 2K Games, 2K Sports, and 2K Play.

My stock analysis suggests that the stock should be doing better with the projected sales. Take-Two Interactive is still up 61% over the past 52 weeks, easily beating the 25.5% return of the S&P 500. But in comparison, over the same period, Electronic Arts is up 95%!

On a valuation basis, Take-Two Interactive is comparatively cheaper versus Electronic Arts and Activision Blizzard, as reflected in the table below.

While Take-Two Interactive is cheaper than Electronic Arts and Activision Blizzard on a price-to-sales (P/S) basis, the key variable to note is how low Take-Two Interactive’s price-to-earnings growth (PEG) ratio is at 0.52, according to my stock analysis (a reading of below 1.0 suggests a cheap valuation). This implies the stock is trading at less than its estimated five-year earnings growth, which is cheap, as my stock analysis indicates.

Take-Two Interactive has beaten the Thomson Financial consensus earnings-per-share (EPS) estimates in four straight quarters. However, as my stock analysis indicates, the issue that I see is that while revenues are estimated to grow at 65.8% to $2.03 billion in fiscal 2014 (ending in March), there’s a drop off of 32.6% in fiscal 2015, according to Thomson Financial. This is a real problem that Take-Two Interactive will face, according to my stock analysis.

The chart shows the bullish golden cross and upward trend. Traders could see a pop to above $20.00 for some profits if the company can deliver a strong fiscal third and fourth quarter, based on my stock analysis.

Chart courtesy of www.StockCharts.com

But until Take-Two Interactive can come up with other successful games, the stock will continue to be a target for traders who trade on the success of the Grand Theft Auto series.