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No sex? No problem!
Take-Two has come under fire for a secret sex scene but some think the stock is still a buy.
September 6, 2005: 1:13 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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A secret sex scene in Take-Two's
A secret sex scene in Take-Two's "Grand Theft Auto: San Andreas" sparked a political outcry and a ratings change for the game.
Sex doesn't sell? Shares of Take-Two Interactive have plunged due to the controversy about the
Sex doesn't sell? Shares of Take-Two Interactive have plunged due to the controversy about the "Hot Coffee" mod in "Grand Theft Auto: San Andreas."
A grand theft of a bargain?
Take-Two trades at a big discount to its rivals despite strong growth.
CompanyP/E*06 Est. EPS Gr.*LT EST EPS Gr.
Take-Two Interactive16.031%15%
Electronic Arts30.720%18%
THQ21.353%15%
Activision26.820%18%
* based on estimates for the next fiscal year
Source:Thomson/Baseline

NEW YORK (CNN/Money) There's no such thing as bad publicity? Try telling that to the investors in Take-Two Interactive.

The company publishes the violent series of "Grand Theft Auto" video games, and shares of Take-Two (Research) have fallen about 13 percent since mid-July after the Entertainment Software Rating Board changed the rating on "Grand Theft Auto: San Andreas" from "Mature 17+" (M) to "Adults Only 18+" (AO).

The reason for this video-game equivalent of an X-rating? The presence of a secret sex scene that could be accessed through a modification that was dubbed "Hot Coffee."

News of the "Hot Coffee" mod first started to circulate in June and Take-Two and the rest of the video-game industry quickly came under attack by many politicians, most notably U.S. Senator Hillary Clinton.

Once the rating was changed, Take-Two said that it would stop producing the current version of the game and retailers such as Wal-Mart (Research), Target (Research) and GameStop (Research) removed it from shelves.

As a result, Take-Two lowered its sales guidance for its fiscal third quarter, which ended in July, and warned that it would report a greater than expected loss. Take-Two is scheduled to release its third-quarter results on Wednesday.

But several analysts think that despite all the bad news, the sell-off in the stock is overdone.

No use crying over spilt "Hot Coffee"

Michael Pachter, an analyst with Wedbush Morgan Securities, said that the "Hot Coffee" flap was something that should not have a long-term effect on Take-Two's sales and profits.

"The stock's been beaten up too much," he said. "The 'Hot Coffee' thing is a one-off. There will be no lasting impact,"

And the new adult-only rating for "San Andreas" isn't likely to lead to a huge decline in the game's popularity, argues Janco Partners analyst Mike Hickey, since the average gamer is in their mid to late 20s.

So if anything, the sex scene controversy might give future "Grand Theft Auto" titles even more buzz.

"Longer-term, 'Hot Coffee' could be a benefit. Considering the age range of GTA players, it's the one thing to make a bad boy title even better to market," Hickey said. "For core gamers, this publicly strengthens the brand."

Take-Two is slated to release "Grand Theft Auto: Liberty City Stories" for the PlayStation Portable (PSP) in October and Hickey believes it will be a big seller for the company.

And even though several retailers were quick to pull "San Andreas" last month, many are still willing to sell the latest game for the PSP. To that end, "GTA: Liberty City Stories" is currently the top-selling PSP game on Walmart.com.

Take a chance on Take-Two's cheap stock

So rather than focus on the problems of the past few months, analysts think investors should look ahead.

In its current fiscal year, which ends in October, analysts are predicting a 20 percent increase in earnings and analysts expect profits to jump 31 percent in fiscal 2006.

Still, Take-Two's stock trades at just 16 times fiscal 2006 estimates, a steep discount to top rivals Electronic Arts (Research), Activision (Research) and THQ (Research).

Hickey concedes that the company does need to prove to Wall Street that there is more to it than just the Grand Theft Auto series.

But he is confident that the company could have hits on its hands with two yet-to-be-released games that are similar in spirit to GTA: "The Warriors," which lets players act out gang wars in New York City, and "Bully," in which you play a troubled reform-school kid standing up to bullies and engaging in other mischief.

Evan Wilson, an analyst with Pacific Crest Securities, said that there have been some rumors that "Bully" may not be ready in time for the holiday shopping season and that this is dragging down the stock as well. Wilson said, however, that he doesn't think the rumors are true. And if the company can reassure Wall Street during its conference call Wednesday that there will be no delay in the release of "Bully" then the stock should bounce back.

"The stock is oversold as long as Take-Two can keep "Bully" in October or November. Our retail contacts haven't indicated that it's going to slip," Wilson said.

Of course, "Bully" and "The Warriors" could also come under fire from politicians as well given their violent nature. But it's worth noting that the ratings change for "San Andreas" was prompted not because of violence but due to sex.

And Pachter thinks that Take-Two has now learned where to draw the line in order to avoid the wrath of Congress.

"Nobody at Take-Two will have the guts to put any hidden sexual content in any game so people are making a bigger deal out of this than is there," said Pachter. "At the end of the day, the stock is really cheap and the discount makes no sense."

For more about the gaming industry, read Chris Morris' Game Over column.

For a look at more software stocks, click here.

Analysts quoted in this story do not own shares of Take-Two and their firms have no investment banking relationships with the company.


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