How to Make Good Money Betting on the Best Products in Entertainment History

 

Millions of people had November 8 circled on their calendars.

In fact, many of these people waited in the cold and rain to buy this important product at 12:00 a.m. that day. No, I’m not talking about the latest iPhone or another tear-jerker from romance author Nicholas Sparks.

I’m talking about a video game where the object is to shoot every enemy soldier with one of several high-tech guns. I’m talking about the release date for Call of Duty: Modern Warfare 3 – which will likely set a 24-hour sales record for being the highest-grossing entertainment product in history.

And investors can make big money betting these high-profile games. Let me explain…

Modern Warfare is owned by Activision. The video-game publisher generates billions of dollars in revenue from the franchise. Each release is carefully planned. A new installment of Modern Warfare takes about two years to develop. Hundreds of developers work around the clock to make sure the game has no flaws – and thus receives good ratings from gaming magazines.

The result is a game which will likely sell 5 million copies in 24 hours. That amounts to more than $300 million in sales. To put it in perspective, that’s more money than any Harry Potter book, Batman movie, or Michael Jackson album generated in a 24-hour period.

Over the past three months, as we approached the release date of Modern Warfare 3, shares of Activision rose more than 30%. That’s much better than the S&P 500 in the same timeframe.

I think the easy money has already been made in Activision. You can see that with the release date behind us, shares have pulled back.

But there’s another opportunity where investors can get “ahead” of the next big entertainment product trend…

You see, the story above is almost identical to the one for Take-Two Interactive. It’s also a video game publisher. The company set records back in 2008 after releasing the latest installment of its signature game franchise, Grand Theft Auto.

In terms of violence, this game makes Modern Warfare look like Super Mario Brothers. Despite controversy over its content – or maybe because of the controversy – more than 22 million copies of Grand Theft Auto IV were sold. At $60 per game, that amounts to over $1.3 billion in total revenue.

Take-Two is much smaller ($1.4 billion market-cap) than Activision ($15 billion market-cap). So this is a jaw-dropping amount of money for the business.

To put it another way, Modern Warfare 2 (which came out in 2009) generated less than $0.35 of the $0.69 in earnings per share Activision generated in 2009. Grand Theft Auto IV (out in 2008) generated more than $1.70 of the $2.08 in earnings per share Take-Two generated in 2008.

The next Grand Theft Auto is one of the most highly anticipated games ever. I’m sure most of the previous installment’s 22 million satisfied customers will buy the next one. Even if just two-thirds of them buy Grand Theft Auto V, Take-Two’s earnings could be in the neighborhood of $2.50 a share in 2012.

The last time earnings were over $2 a share was in 2008. That’s when its last installment of Grand Theft Auto was released. The stock traded as high as $27 – roughly than 100% higher than the current price.

Right now, Activision is trading for 14 times forward earnings. If Take-Two were trading at that level, it’d be $35 per share. That’s about 130% higher than the current price.

Grand Theft Auto V is expected to be released in late 2012. The first trailer of the game was released last week. You can view it here.

I think investors would be wise to buy Take-Two ahead of the next Grand Theft Auto release. Even if sales disappoint, the stock should have a similar trend to Activision leading up to the launch.