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Take-Two Interactive -- Is Cash Trash?


Soon the company's cash on hand will equal to its current market cap.

This year has been incredibly frustrating for me, which sounds idiotic given the S&P 500 (INDEXSP:.INX) is up 26%. It seems like everything I'm long has gone sideways to down while everything I don't own keeps going up every single day.

Take-Two Interactive (NASDAQ:TTWO) is one of those names for me. The stock is $17, up from around $12 at the start of the year. But, for the last six months the name has gone sideways. I didn't have the good fortune to be in the name from January, so now I'm dealing with reality.

Reality is, on October 29, Take-Two blew out its second-quarter 2014 revenues, EPS, and forward guidance for the full year. Revenue grew to $1.27 billion vs $288 million year-over-year (a record number), EPS came in at $2.49 vs. $0.11 YoY, and Cash & Equivalents on hand were ~$662 million (40% of market cap). Did I mention there's a full $1 billion in accounts receivable? And it's due within 60 days. That will take the cash on hand equal to the current market cap. Think about that for a minute. The company also redeemed a convertible note one year early, lowering its long term debt to ~$445 million. Forward guidance for 2014 (ending March) was boosted to $3.50 - $3.75 per share, making the company's P/E ratio a measly 4.8x. Excluding its current cash, that number falls to 2.9x. By year end that number will be 1x.

Grand Theft Auto 5 has been a huge hit; 29 million units were sold by the end of October. Credit Suisse had raised estimates to 30.5 million units from a previous estimate of 20.25 million. The real number could be north of 40 million units.

Take-Two also has a lot of new titles coming to market soon and even more for the next fiscal year.

I haven't even mentioned microtransactions for GTA5 which have been a big success for other games in the Take-Two family.

Given the cash on hand and success of its titles, Take-Two is ripe to be taken over.

The two big names who could do that are Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI). Both are much, much larger than Take-Two and could easily absorb such a deal.

At first glance, it appears that Activision is better positioned for such a move with its $11.75 billion market cap, $4.5 billion in cash (38.65% of market cap), and only $2.2 billion of long-term debt. Add in that its games, including Call of Duty are performing well and it makes sense.

Electronic Arts is about 4.5x larger than Take-Two and has cash level of ~1.5 billion, which is almost equal to Take-Two's market cap. With only $570 million in debt, Electronic Arts could easily issue new debt or equity to finance a takeover.

The big difference between Electronic Arts and Activision is that the former is having problems. Tiger Woods dropped it at the end of October. Battlefield 4 sales have been very disappointing with retailers like Amazon (NASDAQ:AMZN) cutting the retail price drastically a little more than a week after its release.

Ratings for Battlefield 4 have been weak as you can read here, here, and here, and there won't be another release of the game in calendar 2014.
NBA Live 14 rated as a total flop, there won't be any Star Wars games based on upcoming sequels, and sell-through for current games -- including normal big sellers like FIFA -- was described as "soft" during the conference call.

Even if Take-Two doesn't get taken out, the name trades as cheaply as can be found, and business is quite strong and looks to stay that way. Of course, stocks can trade stupidly. It happens often. But there's a large margin of safety in this name that gives me comfort in buying now and on moves lower.

Twitter: @axiosadvisors
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Positions in TTWO, EA

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