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08/12/10 at 7:22 PM CDT



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Michael Pachter Overestimates, Take Two Interactive Shares Tumble

Call it the Pachter effect.

Michael Pachter, who himself has seemed to admit in the past that his monthly U.S. sales estimates for publishers come without much extensive research, has perhaps managed to help move Take Two Interactive’s stock down about 17% in only three days.  How?  On Monday of this week, he threw a dart and estimated that Take Two’s NPD number would be 40 million in sales for July.  He based that on the idea that since Take Two’s hit title Red Dead Redemption sold so well in the first 6 weeks (approximately 2.5M in the U.S.), sales would therefore continue with that kind of fury and come in at over 500,000 for the third month.

He guessed wrong.  In fact, sales estimate website, which puts out weekly figures, put out its estimate for game sales at around half that number on Tuesday of this week – which is exactly when Take Two shares began to tumble, all the way from $10.25 to $8.50.

I’ve seen Mr. Pachter’s monthly sales estimate impact on video game stocks several times before and have called it “The Pachter Effect.”  Mr. Pachter puts out a number (which in my opinion is rarely even based on company guidance), then the market and other analysts use his figures as a way of judging the company’s performance for that month.  The only problem is his monthly estimates are often way off, so much so that even he doesn’t seem to take his own estimates seriously enough to change his price targets or opinion on a company when he is dramatically off.  Instead, he just adjusts his figures and assumes that the actual NPD figure (not his estimate) was already built into the company’s guidance.

Meanwhile, institutional investors like to trade on expectations and may have picked up on his high estimates and compared them with their own analysis (and possibly just went to or for a second opinion).  Knowing “the Pachter effect,” someone may have seen an opportunity to sell (or short) Take Two shares prior to the monthly NPD announcement, figuring that the market would react negatively to the actual NPD results.

What’s the lesson here?  An analyst’s shot in the dark estimate can be a serious matter.  In this case, around 125 million in market cap value lost, and that was before the numbers even hit.  Sure, there are always multiple factors in a stock’s price movement but the timing of the intense three day sell-off coincided exactly with the timing of Mr. Pachter’s monthly expectation report.

Was it reasonable for an analyst to expect high sales of a title in the third month of release after having panned it as being mediocre and having limited appeal only months prior?  Probably not.  Did it matter to his target price or opinion on the company that sales significantly beat his estimates in the month prior?  No.  Does reality even matter in the short term in this casino-like market?  No.

No, it won’t matter until management steps in and provides actual numbers.  Until then, when a vocal analyst provides guidance on sales, he might as well be the company spokesman.

Full disclosure: I am long this company's shares and believe the market has not accounted for the short and long term impact of the new hit Rockstar franchise.

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