Investors of Take-Two Interactive Software Inc. (NASDAQ:TTWO) have undoubtedly heard by now that activist investor Carl Icahn has liquidated his 12.02 million share position in the company. The shares were purchased by the company at $16.93, the closing price of the stock on Monday. Initial reaction to the news took the share price of TTWO below $16 in pre-market trading as well as during regular trading.
The Mysterious Departure
Given that Icahn is known for his value investing, I was quite surprised that he had decided to liquidate his position in TTWO. At the end of the current quarter, a portion of the deferred revenues from 2Q 2014 will officially be recognized as cash. With a net cash position of ~$1 billion and a current market capitalization of ~$1.6 billion, it is difficult to rationalize why Icahn sold his shares. One possible explanation is that he believes after Grand Theft Auto V, the company will have difficulty generating free cash flow and income. Indeed, the criticism that TTWO is a "one trick pony" should be a legitimate concern to investors. However, Take-Two has specifically stated, in its latest quarterly report, that it will "achieve non-GAAP profitability in fiscal 2015 and every year for the foreseeable future." The positive sentiment around TTWO stock, which is rooted in its tremendous intrinsic and enterprise values, are echoed by other SA authors (see here and here for examples).
Not only was Icahn's decision to sell hard to fathom, but the arrangement of the deal was somewhat questionable. Specifically, the idea to pin the transaction price to the closing price of TTWO stock on Monday raises my eyebrow. If one examines the trading action of TTWO on Monday, a steady rise in share price was observed starting at ~12pm. By market's close, the stock had rallied from an intraday low of $16.35 to $16.93. In comparison, competitors Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI) remained relatively flat in the identical time window. Did Carl buy on the open market to prop up the price? A $0.58 increment translates to a $7 million difference.
The Silver Lining
Fortunately, Carl Icahn doesn't own the market. And, he is only human. In 2011, he sold his stake in Lions Gate Entertainment Corp. (NYSE:LGF) for $7 per share. Today, those LGF shares are trading at ~$31. In October of this year, he also sold half of his position in Netflix Inc. (NASDAQ:NFLX). Aside from the intraday spike to $397 after earnings release, NFLX is hitting new closing highs. And how is Blockbuster doing nowadays? Admittedly, an influential man such as Carl Icahn has a large herd of followers and can definitely sway investor sentiment by announcing a position in Apple (NASDAQ:AAPL) or calling for a market correction. However, he is not always correct.
One important data point that was also in the press release was that the company has repurchased 4.2 million shares in the open market. Thus along with Icahn's shares, Take-Two has bought back 16.2 million shares, or ~20% of outstanding shares. A simple calculation would mean the company is now expected to earn non-GAAP net income of $4.38 - $4.69 per share in fiscal 2014, an increase from the $3.50 - $3.75 range provided last month. Even if we pessimistically assume that Take-Two will breakeven until the next GTA release in 4-5 years, that still equates to annualized earnings of ~$1 per share. Backing out $700 net cash ($1 billion subtract costs for Icahn and open market purchases) from the current market capitalization, we arrive at a P/E of 6.4. In relation to Electronic Arts and Activision Blizzard, both of which have P/E in the double digits, Take-Two is remarkably cheap. Investors in TTWO should view Tuesday's announcement as a buying opportunity.