Nico Bellic stars in Take-Two Interactive's Expectation Beating Q2

While it may seem like eons ago now, that Grand Theft Auto 4 (GTA IV) was on the minds and in the hearts of every entertainment writer, blogger, Guiness World Record Book updater and most importantly gamer, the title is still on the books of Take-Two. PS3 and Xbox 360 owners the world over platooned into stores to own what would become the biggest video game launch in history.

With first day sales of $310Million, Take-Two Interactive (TTWO) shattered previous records for a video game launch. Almost 6Million copies sold virtually immediately and by the end of May the tally stood at 8.5Million units. The game's big star, the brash and vengeful European Nico Bellic has become a household name among that critical 18-29 demographic and Take-Two stands at the base of the mountain of its own Liberty City.

The success of the game pushed earnings beyond expectations (adjusted $1.52/share & real $1.29/share vs. $1.12/share expected) and sent Revenue skyrocketing on a year over year basis. Revenue jumped to $540Million from $205Million a year ago. The top line number handily beat analyst estimate averages of $499Million.

And all this while battling a takeover offer from Electronic Arts (ERTS). The EA offer stands at $25.74 a share, currently, with Take-Two stock closing Thursday's trading at $27.65. Clearly there's a gap there and TTWO shareholders are waiting for one of two things. EA to raise its offer by $2 or $3 a share, or to pull the offer of the table completely. When EA initially launched its bid it was valued at approximately $2Billion, and with Take-Two's market stance at a now lofty $2.13Billion, something has to give.

I know what Nico Bellic would do in this situation, but that's neither here nor there. What is clear however, is Take-Two has an absolutely bombshell on its hands and the franchise will only expand as GTA V and GTA VI eventually come through the pipeline. Take-Two has the clout these days to demand much more from EA, but in fact it would be better off to do it alone.

Holding the title of "smaller game studio" underdog is revered in the world of gaming and nothing spells doom for hardcore gaming enthusiasts like their favourite 'chic' development houses getting swallowed by conglomerates. The worst thing that could happen to the golden franchise of GTA is to have it being developed on a yearly basis with small tweaks and thrown on shelves alongside the latest iteration of Madden.

Nevertheless, the ball's in Take-Two's court, and as next quarter's expectations reveal, the company has plenty to keep smiling about. It forecast earnings of $0.45 to $0.55/share for its next quarter, which was a big step up from analysts which centered around $0.32/share.

Now all that sounds rosy, but here's where it gets a little dicey and strange for Investors. Q4 expectations from the company came out at $0.10 to $0.20/share versus analyst estimates of $0.46/share. With revenue numbers falling right in range of the averages for both quarters, the question has to be asked, where are the earnings going later in the year? That's a solid conference call question if I've ever heard one. Nevertheless full year profits of $1.65 to $1.85 per share, bested previous estimates of $1.35 to $1.65.

It's clear the EA offer is still too low and Take-Two has every right to holdout for much more. EA itself sports a healthy Forward P/E ratio of 53! Applying even a 30 forward P/E for the now uber-growth Take-Two gives it a price of $55/share, twice the current offer price. Scaling things back to only a 20 forward P/E for Take-Two sets a price of $37/share.

Shareholders should revolt against the EA offer till it is somewhere in the $30s, then management should start to listen to what EA has to say. With the success of GTA and the impending movie development deal for its BioShock property Take-Two has the swagger, the clout, and the results to demand more, much more. It's in the game!

Disclosure: Author holds no position in TTWO or ERTS