Why Bernstein Thinks Take-Two Is Set To Outperform

Take-Two Interactive Software Inc. TTWO is the video game holding company responsible for the production of game franchises like "Grand Theft Auto" and "Bioshock." The company faces strong competition from Activision Blizzard, Inc. ATVI and Electronic Arts Inc. EA.

The Analyst

Bernstein analyst Todd Juenger initiated Take-Two Interactive with an Outperform rating and a $175 price target.

The Thesis

According to Juenger, video game franchises with the most potential for sustainability have three main factors, including:

• Breadth, benefiting most from community and networking.
• Durability, which provides insulation from competition.
• Optionality, which gives the company options to grow into both breadth and durability.

Take-Two offers all three even with it's relatively small market cap of $14 billion, with such franchises as "Grand Theft Auto," "NBA 2K" and "Red Dead Redemption."

"Grand Theft Auto" has defined a very specific genre that had never before been created, Juenger said. The latest release sold 100 million units and generated over $6 billion, making it the highest grossing video game of all time.

"NBA 2K" continues to outsell EA’s "NBA Live" due to its durability, annual releases and strong in-game transaction proposition. Juenger expects the latest launch of "Red Dead Redemption" to sell 25 million units.

“Management is fond of saying that the company is constrained primarily by development capacity. Part of this is due to TTWO's particular development style and quality control. The company is clearly more interested in game quality than game quantity.”

Price Action

Shares of Take-Two Interactive were down 2.7 percent to $124.20 at time of publication Wednesday.

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Photo credit: RockStar Games, "Red Dead Redemption 2" screens