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Games - Friday, June 20, 2008

Tech:stocker - Game On With EA Sports

Having recently purchased a Wii, we at tech:stocker are feeling a little gamey and decided to look at our favorite company on the software side.

Even when our wives wouldn't allow us to own a PlayStation or an XBOX, we enjoyed visiting our friends who did have these wonderful luxuries and spent hours competing and trash talking over the likes of Madden Football and NBA Live. And we knew we weren't alone given the amount of advertising we saw for their games on ESPN and every other popular media outlet.

This brings us Entertainment Arts (ERTS:Nasdaq), our favorite software maker and a winning investment in an industry that has a few leaders and many followers.

Our chief concern with investing in entertainment software companies is how concerned they are with making a profit. Too often we hear lines like, "we know if we produce the best possible games for our loyal customers, the profits will take care of themselves." As investors, we hate being sold that line which brings us to Entertainment Art's (EA) hostile takeover bid of Take-Two Interactive Software (TTWO:Nasdaq).

Take-Two has done a good job building a group of addicts who stop their lives and glue themselves to their couch and remarry their XBOX 360 or Playstation 3 whenever a new version of Grand Theft Auto hits the stores. But that's where the buzz ends for this company as their 2K Sports versions of baseball, basketball, and hockey have yet to garner the attention, or market share, of their EA counterparts. And we're slightly surprised that they haven't had higher sales considering many hardcore gamers consider Take-Two's offerings far more fun to play.

Ultimately we have to look at what the masses are purchasing when deciding to invest in this industry and how they are using their profits to build a company. EA has done a solid job building an entertainment software behemoth that will be extremely difficult to slay in the near future. On the other hand, Take-Two seems mired in being a company that has sired one extremely popular child and many other kids who will forever be undiscovered savants.

So we find Take-Two's refusal of EA's offer to take the shining star and the lot of misfits extremely puzzling. Before the offer, Take-Two's stock was wallowing in the teens and didn't show a lot of promise. Then along comes EA, the king of the playground, and the stock skyrockets to the mid 20s.

To be fair, Take-Two has helped themselves as Grand Theft Auto IV is flying off the shelves faster than the bullets its main character can shoot. Still, the brain trust that refers to themselves as Take-Two's board should not believe their company is worth 50% more than before EA asked them to play together. Without EA, the stock might be enjoying a small increase from the sales of its favorite son but the execs at Take-Two would still be calling their other entertainment software manufacturers seeing if they wanted to play together.

So when hearing EA decided to lower there initial offer $26 to $25.74 per share, they not only earned tech:stocker's praise, they captured our attention. EA's willingness to find a playing partner if the deal if it isn't on their terms earns our respect and leads us to believe this gamer is a value buy that should finish the year above $53 per share, regardless if they buy Take-Two. And we will enjoy watching Take-Two scramble to find a new best friend when their stock dives as a result of deciding not to play with EA.

And EA? September is a few flicks of our Wii controller away and we know sales of the new Madden Football 09 will increase share price. We can't wait to play.