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Take Two, THQ Down 20% in August

By Perry Rod, Published: September 1st, 2010 12:56 PM CDT

With the NASDAQ and Dow Jones Index down 6% and 4%, respectively, two video game publishers have seen their shares beaten down to a bloody pulp in the last month – THQ Inc. (NASDAQ:THQI) and Take Two Interactive (NASDAQ:TTWO). Competitor Electronic Arts (NASDAQ:ERTS), meanwhile, was down 4% in the same period.

THQ issued a weak quarterly update which sent its shares down beginning in early August.  Take Two investors must have been paying close attention, because Take Two’s plunge occurred almost in lockstep with THQ shares.  Last week, a few THQ insiders followed up by purchasing shares from the open market.  The market has not since reacted to those modest sized insider trades.

Take Two investors have not seen a company warning, but have been nervous about a number of other items, including a recent game delay and less-than-expected contribution from their new hit title, Red Dead Redemption.  Some are also speculating that the secretive Rockstar Games studio plans to push the next installment of Grand Theft Auto into 2012.  Others have been disappointed by recent review scores of their new title, Mafia 2.  On top of that were THQ and Activision’s warnings.  Some investors were also quietly hoping that the less-than-expected contribution from Red Dead Redemption would be countered by a positive pre-announcement last month from Take Two management about earnings.  That did not happen.  Instead, the company missed analyst monthly sales expectations for July, which was when Take Two shares began to slip.

It’s interesting to note that Take Two shares trade at the same hefty discount to sell side analyst price targets as THQ shares at this time, suggesting the market holds a similar pessimistic view on both companies.  However, the two companies could not be in a more different position than they are in today.  Publishers increasingly admit that they are becoming reliant on a small handful of blockbuster internal properties with very large budgets.  The Activision side of industry king Activision Blizzard, for example, relies almost entirely on the Call of Duty franchise to support and provide growth.  THQ, on the other hand, relies on two licensed properties (UFC and WWE) from a developer they do not own (Yuke's Co. Ltd) and hopes a handful of alternative titles like Homefront, Red Faction, Darksiders and Saints Row can fuel growth and get the company out of its current precarious state.

Take Two, on the other hand, has become the last publisher remaining that is introducing highly successful new intellectual properties and expanding those properties.  Take Two shares are a long way off Electronic Arts’ 2008 offer of $26, in large part due to the holiday 2008 failure of racing title Midnight Club, which at the time was Take Two’s second most important property.  However, racing title sales in general fell off a cliff due to casual gamers becoming segmented onto the Nintendo console and away from Sony and Microsoft’s consoles (which is why THQ has had so much trouble).  Since then, Take Two has done three things right that have been more or less ignored by the market. 

  • They have established Bioshock as a profitable franchise and are working on an ambitious third installment led by the developers of the original Bioshock.  With the developer’s track record, along with a larger budget and Bioshock’s established brand name appeal, that property is a likely blockbuster set for 2012.
  • Take Two’s wholly owned subsidiary Rockstar Games established a second blockbuster behind Grand Theft Auto in Red Dead Redemption and now dominates the Western genre of gaming.  This success should also raise expectations for Rockstar’s other internal projects, Max Payne and Agent.
  • 2K Sports has taken control of the NBA market from EA Sports with higher rated titles and superior sales.  An additional factor possibly ignored by market participants is that Take Two has been losing over .40 a share from its ill conceived 2K Sports MLB contract put together by previous management.  That deal finally expires in 2012.

THQ management recently stepped in and bought modest sized positions in their company, which cannot be ignored.  What has been more overlooked is the fact that over a tenth of Take Two is owned by an insider as well, Carl Icahn.  Mr. Icahn and Zelnick have a longstanding relationship and now Icahn’s management has a minority position on the company’s board of directors.  His stake in the company, established before the recent success of Red Dead Redemption, suggests an expectation that Take Two is undervalued.  It also suggests that management (rather than providing better transparency and investor relations) are working to right size the company for him now.  The stock price does not reflect any accomplishments in that direction.  It also does not reflect the fact that Take Two is now the only major U.S. game publisher that has an insider with a substantial stake in the company.  The last time this occurred in the video game space was when Activision insiders loaded up on shares in 2003.  Activision shares have more than quadrupled since then.

Disclosure: author is long Take Two Interactive shares and has no position in any of the other mentioned companies.


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