Oct
15

GTA V Makes Take Two Interactive (TTWO) A Steal

Take Two Interactive (TTWO): Banking on the success of Grand Theft Auto V

The success of Take Two Interactive’s (TTWO) Grand Theft Auto V, has been well documented and is certainly not taking anyone by surprise at this point. What is a surprise is that just weeks after GTA V shattered just about every record pertaining to an entertainment product release, TTWO appears to be trading at a discount with shares down 12.5% in the past month and a half. With sales of their latest blockbuster easily outpacing analyst expectations, GTA Online not being included in most estimates and the successful launch of NBA 2K14 this month, I expect TTWO’s numbers to come in significantly better than what the street is currently anticipating when their Q2 release comes out on the 29th.

Doug Kreutz of Cowen & Company recently upped his price target on TTWO and called for first-year sales of 25 million copies of Grand Theft Auto V after it was reported that the $1 billion sales mark had been crossed in just three days. In a not released to investors earlier in the year, Sterne Agee’s Arvind Bhatia outlined a hypothetical profitability model for GTA V based on an estimated development cost of $137.5 million for the game and a marketing spend in the range of $69- $109.3 million. Bhatia estimated that if GTA V sold only 15 million copies it would translate to operating profit of $193.6 million for the game and would contribute $2.11 to earnings per share. He went on to estimate that should GTA V sell 25 million copies in its first year, operating profit for the game would be $390.8 million or an earnings per share contribution of $4.26. It is worth noting that GTA Online and its contribution to GTA V’s profitability has not been accounted for in Bhatia’s analysis, a number that I believe will be significant with $200 million in revenue expected to be generating in its first year through microtransactions and a free-to-play model.

25 Million Copies Sold In One Month?

Fortunately for us, it is very easy to get a good idea of just how many copies have sold thus far without waiting for Take Two to put out a press release announcing they’ve reached another sales milestone . VGChartz.com publishes weekly sales analysis covering the entire console gaming market, with their most recent report released yesterday covering sales up to the week ended October 5th. From 9/29- 10/5 1,080,086 copies were sold for PS3 and 951,537 copies on XBox, a total of 2,031,623 units moved for the week. That brings total copies sold as of October 5th, less than 3 full weeks from its release date, up to 22,629,833. Considering 2 million copies were sold in the most recently reported week, and 3 million in the week prior, we expect sales will continue to gradually decline but will remain meaningful. Sales will see a boost this week however as the game was just released in Japan and Brazil on October 10th. It would be reasonable to expect that another 1.5-2 million units have been sold in US/ Europe in the 10 days since the last sales report and 500,000 in Japan/ Brazil, putting Grand Theft Auto 5 at 25 million copies sold in its first month, a number analysts were looking for over the course of its first year on the shelves.

For an idea of how these sales figures will translate to Take Two’s revenue/ earnings numbers, a breakdown for a typical $60 game selling at retail looks like…

  • $60 Retail Price
  • -$20 Retailer Margin
  • -$7 Platform Royalty
  • -$4 Distribution/ Packaging
  • Leaving $25-$26 to the publisher depending on how many returns on sell-in versus sell-through

25 million copies sold would translate to $625- $650 million in revenue for TTWO from Grand Theft Auto V. Its been reported that between production and marketing costs Take Two spent $265 million on GTA V, yielding a profit of $360- $385 million. Even if we assume GTA V has already sold 70% of the total copies it will sell for the year in its first month, a high number to assume with the holiday season upcoming and a PC version reportedly expected in Q1 2014 (not to mention the potential for a release on PS4 and Xbox One to add to sales), 10.7 million more copies sold would account for the remaining 30% over the course of GTA V’s first year. That would bring the total profit contribution from Grand Theft Auto V in its first year to $628-$662 million. To put that number in perspective consider TTWO has an enterprise value of only $1.4 billion. Some analysts have also stated they expect $200 million in digital sales in the first year from the multiplayer component of their blockbuster, GTA Online. The margins on this revenue should be quite high as they are merely selling in-game cash that players can use to purchase cars, weapons, and other items to use while playing online. This number is expected to reach at least $500 million over the lifetime of the game.

Take Two Is More Than Just Grand Theft Auto

The most common criticism of Take Two Interactive and what appears to be the current market sentiment, is that they are too reliant on the Grand Theft Auto franchise. It is true that TTWO is reliant upon producing blockbuster games with installments coming only once every few years, while Electronic Arts (EA) and Activision (ATVI) have annual releases of their key franchises. Yet they don’t shy away from this fact, they believe in building blockbuster franchises, taking their time to ensure the end product is up to their standards, and building out brands/ intellectual property that has long-term value. Just this month they released their annual installment of NBA 2K14 which has been met by stellar reviews. Last year’s edition sold over 5 million units and the franchise is their most reliable annual revenue source. They also picked up the rights to the WWE franchise from THQ, THQ’s version last year sold 2 million copies. BioShock Inifinite, released early this year and selling over 4 million copies thus far, is the third installment in a franchise that has also proven to have staying power and be a consistent seller. Throw in the Borderlands and Max Payne franchises and Red Dead Redemption (13 million copies sold), and it is clear Take Two has built a valuable portfolio of brands that have amassed loyal fans, making this company more than just a Grand Theft Auto story regardless of the outsized returns that is generated from that one source.

It is an exciting time for the video game industry right now. Grand Theft Auto V has shattered nearly every record there is in the industry within a month of being released, the next Call of Duty franchise is coming in a few weeks, and both the Playstation 4 and Xbox One are slated to be released in November. While the dynamics of the industry have certainly changed over the past few years, we have seen the potential of digital distribution, downloadable add-ons, and free to play models with in-game currencies. With an installed base of players sure to exceed 30 million players for Grand Theft Auto V alone, Take Two is positioning themselves to take advantage of the shift to digital distribution and monetization of social worlds in games. Within 3-5 years all distribution in the industry could be digital, while certainly an alarming thought for GameSpot (GME), it could be a windfall for publisher’s and their margins as well as boost revenues through the added ease of purchase created for consumers.

TTWO Is a Buy at Current Levels

I expect Take Two to blow out estimates when they report results on October 29th on the back of Grand Theft Auto sales for the first month meeting their expectations for the year. The consensus estimate is looking for earnings of $1.55 per share for the quarter. With 22.6 million copies sold by October 5th, it seems reasonable to assume 21 million copies were sold in the first two weeks of the games release which were the last two weeks of TTWO’s Q2. This total easily surpasses the consensus estimates, I expect earnings in the range of $2.30-$2.40 per share for Q2 and a rosy outlook for the rest of the year on the continued strength of Grand Theft Auto V through the holiday season and the releases of NBA 2K14 and WWE 2K13. The lack of any future visibility regarding Take Two’s pipeline of games is contributing to their current undervaluation in my opinion, but expect management to offer some sort of plan for the future leveraging the strength of their portfolio of brands and proven franchises. With the windfall of cash that will be added to the company’s coffers through GTA V sales, a share buyback or other means of returning capital to shareholders becomes a distinct possibility. After bidding shares up for months leading up to GTA’s release, investors have taken a pessimistic view of TTWO despite sales of their hit game easily outpacing the street’s already lofty expectations. Look for the Q2 conference call in two weeks to shore up concerns about the pipeline and present numbers far exceeding expectations, with Grand Theft Auto V poised to contribute over $600 million in earnings in its first year. The future is bright for Take Two and the industry as a whole with the next console cycle about to begin, and innovations in digital distribution and online gaming continuously offering new opportunities. I believe fair value for TTWO equity is $24-$26 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
11

Golden Week Gaming Revenues Up In Macau

Macau Casinos Continue to Outperform During Golden Week: LVS, MGM, MPEL, WYNN

The Golden Week holiday in China is one of the biggest weeks of the year for Macau historically and this year proved no different based on preliminary data from Macau officials. Gaming revenues for the first 6 days of October were up 18- 22% year over year. Analysts were looking for a 16-21% hike in revenues. The average daily table win for the first six days of October in Macau was HKD $1.68 billion, a 30% increase from the same period last year. According to Nomura Securities analysts Harry Curtis, Louise Cheung, and Brian Dobson…

Mass headcount and play levels remain strong, which we think should continue. We estimate mass table revenues could be up 31-34% YoY for the month, which is just above recent trend of 30-32%.

Adding to a very strong September, numbers for Macau continue their trend of coming in stronger than expected. In no surprise to those with an understanding of the Macau market, tourist arrivals during the Golden Week were up 4.7% year over year, despite a ban on ‘zero-fare’ travel packages from mainland China. October is supposed to be a record month in Macau for Las Vegas Sands (LVS), MGM Resorts (MGM), Melco Crown Entertainment (MPEL) and Wynn Resorts (WYNN), and the first weeks result do nothing to indicate otherwise. I remain bullish on the entire sector and MPEL remains our favorite play in Macau out of the group. Numerous other analysts have reiterated or raised their ratings on the group, all echoing bullish sentiment. Citi also named MPEL as their top pick last week.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
11

Significant Value In Madison Square Garden (MSG)

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Madison Square Garden (MSG): Hidden Assets, Storied Franchises, Deep Value

Spun off by Cablevision in early 2010, Madison Square Garden (MSG) has seen its shares triple since coming public, currently trading just 10% shy of all-time highs. Despite this run-up, I believe there is room for further appreciation. For the purposes of this report, we will view The Madison Square Garden Company as a holding company, and use a sum of the parts analysis to determine what we believe to be MSG’s intrinsic value. Much more than just their world-famous arena, this company is composed of numerous valuable assets and operates in three segments: MSG Media, MSG Entertainment, and MSG Sports. MSG Media is made up of MSG Networks and Fuse Networks, who is currently being shopped around by J.P. Morgan. The entertainment segment hosts and presents various concerts in MSG’s venues, as well as creates and produces various live acts such as the Rockettes. The MSG Sports segment houses the New York Knicks and New York Rangers, two of the most valuable franchises in their respective sports. Also of significant value is the companies namesake, the Madison Square Garden arena, the most iconic sports and concert venue in the world. All pieces accounted for, MSG contains an extremely valuable collection of assets that can be easily distinguished and valued.

MSG Media: MSG Networks and Fuse Networks

MSG Media is the most valuable segment of the company, accounting for nearly half of the total revenue. MSG Networks, broadcaster of the New York Knicks and Rangers games, is one of the most profitable regional sports channels in the country. In recent years the value of regional sports broadcast rights has exploded, the Los Angeles Lakers are in the first year of a 20 year, $3 billion deal with Time Warner. Even more recent, Time Warner secured the rights to broadcast the Los Angeles Dodgers games for the next 25 years for $8.5 billion, the largest such contract in history and one that will set the precedent for regional rights contracts to be negotiated in the future. In the past 12 months, MSG Media produced Adjusted Operating Cash Flow (AOCF- defined as operating income before depreciation, amortization, share-based compensation, and restructuring charges) of $349.5 million and operating income of $328.6 million, increases of 35% and 44% respectively. While Fuse Networks is accounted for in these numbers, it is worth noting that MSG Networks commands $4.91 per subscriber monthly while Fuse charges providers only $0.06 per viewer per month, so we will assume Fuse’s contribution to profitability numbers are next to nothing. Traditional media companies such as CBS (CBS), Viacom (VIA), Disney (DIS) and 21st Century Fox (FOX) generally trade at 10-12x EV/EBITDA. Applying these multiples would yield a valuation range of $3.4 billion- $4.1 billion for MSG Networks. With earning growth rates far outpacing those of CBS, DIS, FOX and VIA, and the exploding values of regional sports TV contracts, I view valuation multiples in the 12-14x EV/EBITDA range as more appropriate for MSG Networks. MSG has recently retained J.P. Morgan to explore a sale or any strategic alternatives after being approached by multiple parties expressing interest in acquiring Fuse. Analysts expect a sale and expect it to net $300-$400 million. Assuming a fair valuation range of $4.1 billion- $4.75 billion for MSG Networks given our suggested 12-14x EV/EBITDA multiple, and an expected $300- $400 million of value unlocked through a sale of Fuse, I believe the MSG Media segment is worth $4.4- $5 billion.

As of today’s close, MSG has an enterprise value of $4.15 billion. Yes, by buying at current prices you are buying MSG Media at a slight discount and getting a bunch of other extremely valuable assets for free at the same time, so lets determine what these other assets are worth.

MSG Sports: New York Knicks and New York Rangers

For the purposes of valuing the New York Knicks and New York Rangers, we are going to begin with the most recent Forbes valuations of each and make some necessary adjustments to determine their worth. Forbes currently estimates the Knicks value at $1.1 billion and the Rangers at $750 million. Of this combined $1.85 billion, $543 is attributed to the stadium, which we will back out of our valuation. For their valuations Forbes defines “market” as the portion of a franchise’s value attributable to its city and market size. While a subjective figure, Forbes places a value of $838 million on the “market” for the two franchises. With about half of the Knicks media revenue generated locally through their TV stations, and 70% for the Rangers, we will adjust the value of their “market” to reflect that fact that we have already valued MSG Network separately. I don’t feel it is fair to discount a full 50% and 70% respectively of their values as they generate revenue in other avenues and I feel a good deal of their “market” value is derived from the fact that they are two of the most storied franchises in the NBA and NHL and have fans that will show up win or lose, so we will take 15% off the Knicks and 25% off the Rangers Forbes “market” values. After these adjustments and backing out the value attributed to the stadium, we place a value of approximately $1.15 billion on the two franchises, a number that seems extremely cautious given the inflated prices over perceived true valuations that sports franchises have been acquired for in recent years.

Outside of the Garden, MSG has a sizable portfolio of properties consisting of Radio City Music Hall, the Beacon Theatre, the Forum, the Chicago Theatre and the Wang Theatre. They also own the production company for numerous shows hosted at these venues, most notably the Rockettes. We estimate the value of these properties at $350 million.

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Hidden Value in Madison Square Garden Arena and Air Rights

And last but certainly not least, is the Madison Square Garden arena itself, arguably the most famous sports venue in the world. This month will see the completion of a $1 billion renovation project that has been ongoing for years at the Garden, finishing a long needed overhaul that greatly improves the value of the building itself. More valuable however are air rights among other things, assets found nowhere on MSG’s balance sheet, from their Form 10…

We own the Madison Square Garden building, the platform on which it is built and certain development rights (including air rights) associated with the lot. Madison Square Garden sits atop Pennsylvania Station, a major commuter hub in Manhattan, which is owned by the National Railroad Passenger Corporation (Amtrak). While the development rights we own would permit us to expand in the future, any such use of development rights would require various approvals from the City of New York.

The real estate around Madison Square Garden is owned primarily by Steve Roth and Vornado Realty Trust. He has been pushing unsuccessfully for years now to get the Port Authority to fund a purchase of Madison Square Garden arena and its air rights, so that Penn Station can be transformed through a massive renovation. The project has been unable to gain footing because of the highly restrictive costs of buying Madison Square Garden and its air rights, a transaction estimated to require $2 billion to complete. This number may sound high but when you consider that the aforementioned development rights account for 5.4 million sq ft, through simple calculations we can see it is not. At a conservative $250 per square foot, 5.4 million square feet would be worth $1.35 billion. If we place a value of 65% of the completing renovation’s costs, the arena itself would be valued at $650 million, placing a value of $2 billion on Madison Square Garden arena and its development rights.

MSG is a Buy at Current Levels

Having now placed an individual value upon all of Madison Square Garden’s meaningful assets, we can sum up the parts and come up with a fair value of the company as a whole. We have placed a valuation of $4.4- $5 billion on MSG Media, $1.15 billion on the Knicks and Rangers, $350 million on venues outside of the Garden, and $2 billion on Madison Square Garden and its air rights. After summing these figures up, I believe an enterprise value of $7.9- $8.5 billion would represent a fair valuation of the Madison Square Garden Company, a significant premium to today’s closing EV of $4.15 billion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
03

Twitter (TWTR) Files for IPO, Seeks to Raise $1 Billion

Twitter (TWTR): Files For $1 Billion IPO

Long anticipated, Twitter has filed their S-1 Statement with the SEC, moving forward with their plans for an IPO this year. Twitter will list under the symbol TWTR. A few key notes from the S-1 Statement…

  • Twitter had 218 million monthly active users as of 6/30/2013, an increase of 44% year over year. Of the 218 million, 169 million are international users.
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  • Twitter’s 218 million active users tweet over 500 million tweets per day.
  • Revenue for the first 6 months of 2013 of $253.6 million, an increase of 107% over the first half of 2012.
  • Twitter generates 65% of their advertising revenue from mobile devices.
  • Net loss for the first half of 2013 was $69.3 million, an increase of 41% year over year.
  • Adjusted EBITDA increased from $0.7 million for the first 6 months of 2012, to $21.4 million in the same period this year.
  • Twitter is using “Timeline Views” rather than pageviews to measure their ability to monetize their platform. Twitter defines timeline views as the total number of timelines requested when registered users visit Twitter, refresh a timeline or view search results while logged in on our website, mobile website or desktop or mobile applications.
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  • Twitter defines advertising revenue per timeline view as advertising revenue per 1,000 timeline views during the applicable period. In the three months ended June 30, 2013, Twitter’s advertising revenue per timeline view was $0.80, a 26% increase YOY. In the three months ended June 30, 2013, TWTR’s advertising revenue per timeline view in the US was $2.17 and $0.30 in the rest of the world, increases of 26% and 111% from the three months ended June 30, 2012, respectively.
  • Twitter has raised $759.2MM in Series A thru G convertible preferred stock rounds

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
03

Strong September for Macau Casinos

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Gaming Revenues Continue to Grow In Macau: LVS, MGM, MPEL, WYNN

Capping off another strong month for Macau Casinos, the Macau Gaming Inspection and Coordination Bureau reported that gross gaming revenue for the month of September rose 21.4% year over year, versus a 12.3% rise in September 2012. For the year, Macau gaming revenues are up a robust 16.7%, as most month’s revenue figures year to date have exceeded expectations. Both the VIP and mass market segments have been strong. This bodes well for Melco Crown Entertainment (MPEL), Wynn Resorts (WYNN), Las Vegas Sands (LVS), and MGM Resorts (MGM). MPEL remains our favorite of the group, possessing the best growth prospects, cleanest balance sheet, and is currently the only Macau pure play listed on US markets. In the most recent quarter, 70% of WYNN revenues came from Macau operations, 64% for LVS, while MGM generated only 34% of net revenues in Macau. Expect to see gross gaming revenues continue to come in strong for the whole region for the remainder of this year and into next.  For more on MPEL check out our full report, The Best Bet in Macau is Melco Crown Entertainment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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