TTWO shares drop on earnings warning, stock option investigation
by Vladimir Cole 
{ Sep 1st 2006 at 4:45AM }
Take Two just warned Wall Street analysts that their estimates for Take Two earnings in upcoming quarters are "too high," and disclosed new subpoenas from the NYC district attorney's office for documents related to stock options grants. Company shares dropped over 8% to $11.20 in after-hours trading.
Some gamers might be tempted to shrug off all this bad news and what it's done to Take Two's shares, figuring that what happens on Wall Street doesn't matter so long as Take Two delivers the goods next October with Grand Theft Auto IV.
But Take Two's financial woes do matter because the company uses its stock as compensation. When the company's shares drop, employees take a de facto pay cut, making it more difficult for the company to motivate and retain the brains that create hit titles. In the software and creative industries, it's said that 100% of company value walks out of the door every evening. If this keeps up, Take Two's going to have a harder time convincing employees to return the next morning.
[Disclosure: I own way too many shares of Take Two. My wife reminds me of this almost daily.]
Reader Comments (Page 1 of 1)
azesino @ Sep 1st 2006 5:13AM
Thanks God I didnt Bough those Take 2 Shares last year :)
Metal @ Sep 1st 2006 7:38AM
Buying shares of a company just because they have ONE good controversial product. I suggest you sell off and count your losses.
I have alot of shares in Nintendo - even though I had to bust my ass to get them, and EA (I know, Iknow).
Platinum Skeet @ Sep 1st 2006 8:09AM
Stocks are always changing and your always suppose to wait for the stocks to get a $2-5 gain then sell them.
So bassicly buy T2 stocks the quater before GTAIV comes out. Then sell it later that year before the stock drops...
ben @ Sep 1st 2006 8:46AM
GTA 4 is coming out in 2007.. Right?
Jay @ Sep 1st 2006 9:58AM
The company also said increased professional fees related to the options investigation and the cost of relocating its international publishing headquarters will weigh on results.
epobirs @ Sep 1st 2006 10:03AM
With this disclosure it shouldn't be long before Jack Thompson begins accusing the entirety of gaming journalists of having a financial interest in the popularity of certain games. This should be fully encouraged to allow Thompson's delusional instincts to go into overdrive and weave an elaborate conspiracy theory.
Icelandman @ Sep 1st 2006 9:56AM
Markets fluctuate a lot, I suggest waiting for the inevitable rising trend that comes from Holiday sales, but before the sales figures are released. And ride that wave of rising stock value before you consider dropping your shares because you're bound to lose more when you simply drop the shares when they're down in value momentarily. Thats all you need, Buy low, Sell High... it'll never be any different.
Jeff @ Sep 1st 2006 11:11AM
"Markets fluctuate a lot, I suggest waiting for the inevitable rising trend that comes from Holiday sales"
Any holiday sales trend is already built in to the stock price.
If there's one thing the market is, it's way ahead of you. It may not always be *right*, but it looks at guidance and trends and projects those out as far as it can.
The P/E ratio of any company will usually tell you basically how long of a trend is built in to the stock. A P/E ratio of 8, for example, would mean that it would take 8 years for the stock price to align with company earnings. Buyers have determined in that case that they're betting the company will continue to grow into their stock price. Some fast-growing companies can have P/E ratios in the hundreds - in those cases, you're looking at very risky stocks with a lot speculation going on.
A P/E of 0 means the company is losing money. In which case stock valuation can almost never be low enough. But still, the market looks at future guidance, and that guidance extends at least through the next several quarters. And it's not as if GTA4 is an unknown quantity. It's already built into the price.
If you'd have bought TTWO stock over the past several years expecting it to go up before or after every holiday, you'd have lost more than 50% of your money by now. This isn't a "fluctuation", this is investors buying based on earnings.
TTWO's fundamentals are terrible. I would never buy this stock. Here are some of their other numbers:
"Gross Margin 23.57%
Operating Margin -14.55%
EBITDA Margin -1.13%
Profit Margin -8.84%
TTWO's Gross Margin is less than 85% of other companies in the Software & Programming industry, which means it has less cash to spend on business operations as compared to its peers. As indicated by the Operating Margin, TTWO controls its costs and expenses as well as its peers.
Return on Assets -9.73%
Return on Equity -12.97%
Return on Inves. Capital -12.84%
Earnings Per Share -191.8
Sales -23.8
TTWO's EPS Growth Rate is less than 90% of its peers in the Software & Programming industry.
Price/Earnings (TTM) --
Price/Sales 0.88x
Price/Book 1.37x
Price/Cash Flow 25.92x
TTWO was not profitable in its latest fiscal year, therefore the P/E Ratio is not applicable. Its Price to Cash Flow Ratio would give an alternative indication of its expense relative to the Software & Programming industry."
Do yourself a favor and avoid this stock.
pandlcg @ Sep 1st 2006 11:46AM
Jeff,
Although many of the fundamentals at TTWO are terrible the draw of the stock is based on how "cheap" the stock is compared to its peers using those very same ratios you just mentioned. When i left the industry (may 2006) EA's '08 P/E ratio was 30x while TTWO's was in the teens.
You are right that it has been losing money, but projections one and two years out have the stock back in the black. Yes these are just projections, but like you said people are building future expectations into the stock. With a company like TTWO though, there are little expectations (hence the discounted value) since the company has so many financial problems and scandals with its options. This means that a company with one of the most powerful franchises ever is trading in the bargain bin. Then again projections are just that, and are always changing. Each investor has to decided if they can stomach the risk.
Austin @ Sep 1st 2006 1:50PM
GTA is not going to save this company. The mismanagement goes beyond stock option backdating to just plain stupid. Games dont do well in politics in the first place but they cant ban it. Go with the bad ass image you already have it. I hope saints row is a hit and puts there dumb ass management out of business.
thegrey @ Sep 1st 2006 2:32PM
Time jump into some TTWO options for 08.
shares @ Sep 8th 2006 2:04AM
I can definitely see what you mean here. Having only one major product has been an achilles heel for take two interactive. They need to come up with some other games and diversify a bit. The employee share issue is also very worthy of noting. Thanks for the heads up.