Video Game Maker's Breakout Could Land Traders 53% Returns by Spring

I suspect The New York Times was being a tad hyperbolic when it called "Grand Theft Auto V" "the most immersive spectacle in interactive entertainment."

But gamers themselves are over the moon. Thousands of video stores worldwide opened at midnight on Sept. 17 to welcome a flood of eager players. In the first 24 hours of its release, worldwide retail sales exceeded $800 million. This figure excludes Japan and Brazil, where the game will soon be launched.

This sales figure was the highest in history for the "Grand Theft Auto" series. It was also the most lucrative of any game released by Take-Two Interactive Software (NASDAQ: TTWO), a leading maker of video games.

In comparison, when competitor Activision Blizzard (NASDAQ: ATVI) released "Black Ops 2," the latest game in the popular "Call of Duty" series, the company took in $500 million in the first 24 hours. Not bad, but only about 60% of TTWO's haul.

According to Take-Two Chairman and CEO, Strauss Zelnick, the outlook for fiscal 2014, ending in March, appears strong. In addition to "Grand Theft Auto V," the company plans to launch updated versions of the popular NBA basketball and WWE wrestling games. With these games on the horizon, management believes it could be one of the company's best years ever.

According to Zelnick, the company is "well-positioned to capitalize on the opportunities presented by the upcoming launches of the next-generation consoles." Zelnick also says his company will benefit from "an extensive development pipeline."

Shareholders certainly seem optimistic about the stock's potential.

TTWO Stock Chart

Rising from an August 2012 low of $7.37, shares formed a major uptrend and have more than doubled since then.

In August 2013, TTWO hit a multi-year high of $19.25. Prior to hitting this peak, shares had been capped by a shelf of resistance between $15.77 and $17.58, unsuccessfully challenging the upper end of this range in May 2013.

In July 2013, however, shares blasted through this shelf of resistance. So far, they have bullishly held during tests of this zone. They also remain above the major uptrend line, an important bullish technical sign. The Relative Strength Index (RSI) remains above the key 50 level, even on the most recent pullback. Moving Average Convergence/Divergence (MACD) is on a weak buy signal.

If shares rally on the success of blowout "Grand Theft Auto V" sales, they could again challenge the recent $19.25 peak. A breakout of that level would clear the way for a retest of the all-time high above $27, hit in June 2008. At current levels, this target represents 55% returns.

The bullish technical outlook is supported by strong fundamentals.

For the upcoming fiscal second quarter of 2014, to be reported Oct. 28, management projects revenue could increase at least 160% to $750 million to $800 million from $288 million in the comparable year-earlier period. Strong sales of the company's most popular video games, including "Borderlands 2," "NBA 2K13," and of course, "Grand Theft Auto V," are expected to contribute to the gain.

For the full 2014 fiscal year, the company anticipates revenue could surge about 50% to the $1.77 billion to $1.87 billion range from $1.22 billion last year.

The earnings outlook is also positive. For the upcoming fiscal second quarter, management has guided that earnings will likely skyrocket over 990% to the range of $1.20 to $1.35 per share from just $0.11 per share in the comparable year-earlier quarter. The company expects full-year fiscal 2014 earnings to increase, at minimum, 525% to the range of $2.25 to $2.50 per share from $0.36 per share a year earlier.

In addition, the company is attractively valued based on its expected five-year PEG ratio of just 0.57. The PEG ratio compares the price-to-earnings (P/E) ratio to the expected growth rate. Typically, a PEG of 1 or under shows good value.

Based on the company's strong fundamental and technical outlook, I plan to go long TTWO.

Risks to consider: Management has given very bullish guidance for the 2014 fiscal year. Based on strong initial sales of "Grand Theft Auto V," these projections seem reasonable. However, if the launch is simply a flash in the pan, the estimates could prove optimistic. 

Recommended Trade Setup:

-- Buy TTWO on a break above $17.54 resistance
-- Set stop-loss at $15.79, just below current support marked by the intersection of the major uptrend line
-- Set initial price target at $27.07 for a potential 54% gain by spring 2014

[Market Outlook] Why I Can't Stop Talking About The 200-Day Moving Average
Premium Content  | Amber Hestla | February 12, 2019

Many investors hold strong opinions about the 200-day MA... but is it actually important?