'Risky' Take-Two could struggle to make profits, warns analyst

Grand Theft Auto IV may only enjoy modest sales when its launched later this year, due to competition from another highly anticipated gaming franchise, Halo 3.

Analyst Michael Pachter sees a more loyal following for the Bungie sci-fi shooter than Rockstar's urban crime sim, while a small installed base of next-gen console owners and increased competition from the Nintendo Wii will also hamper sales.

The analyst detailed a significant number of warnings over the future of publisher Take-Two, including concern about profitability, the performance of the rest of its gaming portfolio and the possible loss of key creative staff.

"We expect only modest results for Grand Theft Auto IV when it launches this Fall," said Pachter.

"Although we expect demand to be high, we think that the addressable market will be quite small, with only approximately 13 - 14 million Xbox 360 owners at launch and only around 5 - 6 million PS3 owners in the US and Europe," he detailed.

"GTA IV may attach at a slower rate than many anticipate, given that it is expected to launch in the same window as Halo 3 on the Xbox 360. In our view, Xbox 360 owners who choose to buy only one of the two games at launch will opt to buy Halo 3 first, because of its well-developed online gameplay and fiercely loyal fan base."

The opinions on Grand Theft Auto IV are one of a number of blows the analyst dished out in it's latest note to investors.

Wedbush Morgan also believes that apart from the GTA license, Take-Two has a poor portfolio of titles, including a sports division struggling to turn a profit.

"We think that Take-Two's flagship franchise, Grand Theft Auto, will continue to generate significant profits, but are less optimistic about the profit potential from its sports business and from everything else," said Pachter.

The analyst believes that the publisher has made erratic choices in the pursuit of profits over the past two years.

"Other content is the wild card for Take-Two," he said.

"We think that the company's strategy over the last two years has been unsound, as it appears to us to have chased revenues from any source without regard to the profit potential of the game," he commented.

Wedbush has downgraded Take-Two's stock to 'sell'. The company also lists the ongoing corporate investigations by the SEC and the quitting of key employees such as former COO Gary Lewis and co-founder of Rockstar Games, Terry Donovan, as other key factors in making Take Two a risky company to invest in.

"We think that there remains significant risk at the company," said Wedbush.

"This risk consists of ongoing risks from the NY DA investigation, the risk that the company could lose key talent that is responsible for its flagship game, the risk that GTA may decline in popularity, and the risk that the company's recent losses are not a reflection of the console transition, but are instead a symptom of bad decisions."

"We think it is is important to note that while Take-Two lost an estimated US $70 million in calendar 2006, its closest competitors were all profitable," concluded the analyst.