Take-Two Gets Second Chance

Despite burning investors again, many analysts see a cheap stock with key titles in the offing.
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Take-Two Interactive

(TTWO) - Get Report

may have had bad news for investors on Wednesday, but most Wall Street analysts were offering a more upbeat message.

The video game software company missed consensus earnings targets, lowered guidance for its current quarter, and offered a disappointing outlook for its coming fiscal year. Instead of downgrading the stock in response, most analysts simply lowered their price targets, the equivalent of a slap on the wrist. And many gave the company cover with bullish takes on its prospects.

Citigroup's Elizabeth Osur, for instance, dropped her price target on Take-Two shares to $31, down just $2 from her earlier one. But she maintained her buy rating on the stock.

"We are reiterating our bullish outlook for Take Two. We think that aftermarket selling was overdone, shares could bounce back on Thursday, and the stock looks even more attractive at this lower entry point," she said in a report issued Wednesday night. Citigroup has not done recent investment banking business for Take-Two.

But investors were a bit more skeptical. Although the stock was up slightly from the depths it reached during after-hours trading on Wednesday, it was still off $1.55, or 6.4%, to $22.61.

Although few analysts went so far as to downgrade the stock, some did find room for skepticism as well. In a note issued Thursday, Wedbush Morgan analyst Michael Pachter, for instance, observed that Take-Two's 2006 guidance implies that it expects to post stronger-than-usual results in its fiscal fourth quarter. But the company hasn't said when it might roll out the next console-based version of its

Grand Theft Auto

franchise, which might help it achieve that goal -- or what else might help lift fourth-quarter results next year.

"We are confused by the company's guidance, and see no positive catalysts over the next six months," said Pachter, who nevertheless maintained his buy rating on Take-Two shares, but did drop his price target to $33 from $34. Wedbush has not done recent investment banking for Take-Two.

Take-Two

reported fiscal third-quarter results on Wednesday that included a far wider loss than the year-earlier quarter. The loss was wider than Wall Street's average expectations by about 3 cents a share.

But much of the disappointment may have been expected, given that the

company had pulled the latest iteration of

Grand Theft Auto

from store shelves in July following a fiasco involving explicit sexual content hidden within the game.

The company, however, had other disappointing news on Wednesday. It delayed the release of

Bully

, an anticipated hit, and the Japanese version of

Grand Theft Auto: San Andreas

from the fourth quarter into next year. As a result, it slashed its outlook for its current quarter.

But that doesn't mean 2006 will be correspondingly better than analysts' expectations. Indeed, the company's first guidance for 2006 was, at the midpoints, considerably lower than what analysts were expecting without the title delays.

Still, even with the stock selloff -- and perhaps because of it -- the company found support among both investors and analysts on Thursday.

Exis Capital, for instance, bought up shares following the earnings report, said portfolio manager Erik Swords. The company's stock is cheap compared to its peers and the company has done a great job of diversifying its lineup beyond its flagship

Grand Theft Auto

franchise, he said.

"This is a stock that over the next 18 to 24 months has the chance of doubling my money," said Swords. "Show me any company, other than

Electronic Arts

(TTWO) - Get Report

, that has product potential that

Take-Two's upcoming titles have."

Credit Suisse First Boston analyst Heath Terry made a similar case in a report issued Thursday.

"Despite the disappointing guidance, we continue to believe that Take-Two represents the best risk/reward among the small-cap video-game companies," said Terry, whose company has provided non-investment banking services to Take-Two in the past year.