We initially bought TTWO for our investment portfolio (post below) on January 13th, when the stock was trading $17.40. The thesis was based on the fundamental idea that investors were not giving TTWO’s full gaming portfolio enough credit. The market has been most focused on TTWO sales, but little focus on the gradual improvement in the peripheral portfolio, as well as the growth in the digital footprint.
Moreover, based on initial sales data, it seemed like TTWO had picked up significant share with GTA and NBA 2k14. Finally, management indicated its own confidence in TTWO’s valuation by buying back shares from Icahn at a price of $16.93. Management’s strategy and execution gave us confidence in both its words and actions as it laid out reasons for optimism in 2014 and 2015.
We wanted exposure ahead of this quarter’s earnings release, but options pricing was expensive, and we were quite comfortable with the potential downside to simply owning the stock, given the cheap valuation.
Fast forward to today. TTWO reports earnings after the bell. It made a new 5 year high this morning before selling off along with the market weakness. We want to leave our long stock position as is, but looked at potential put protection ahead of the earnings event, just in case we’re wrong, or the stock’s reaction is worse than we expect.
But here’s the problem – options pricing is expensive. Since we have no interest in capping our upside (we bought the stock with earnings in mind), buying puts or put spreads outright does not look great. For example, if I was concerned about the tail risk, the Feb 17 puts cost about 0.25, so my break-even is all the way down at 16.75. So I’m giving away more than 1% for protection that only kicks in down 13% in the stock.
The one structure we considered was the Feb 18/17 put spread for about 0.30 (when the stock was around $19). But even there, you’re paying about 1.5% for only about 3.5% of protection on the downside. In the end, we decided to just remain long stock into the event, with the comfort that our initial entry was decent.
$TTWO – New Investment, Going Gaming, January 13, 2014
Here’s the next addition to our investment portfolio:
We took a Deep Dive look into TTWO almost a month ago. Take Two Interactive has been a frustrating stock for investors over the past decade, essentially trading higher and lower and ending up in the same place as it was 10 years ago, on a very volatile earnings stream. However, we saw a couple reasons for more optimism going forward:
1) Management has been much better since TTWO’s 2007 accounting scandal. Zelnickmedia, led by Co-Founder Strauss Zelnick, was at the head of a takeover of the company along with other large investors. Mr. Zelnick has been Chariman and CEO since January 2011, but heavily involved since 2007.
2) The company’s library of content is the best in the industry, as cited at the start, but more importantly, management expects annual profitability for the foreseeable future (as a result of that much more flexible library of content).
Management gave one more recent signal of their own confidence in the company’s prospects. TTWO bought back Carl Icahn’s $200 million stake in Take Two at $16.93 per share in November. Carl Icahn’s exit caused investors to initially react negatively to the news, but the stock quickly rebounded as management repeatedly communicated that the buyback (one of the largest in years for the company) reflected an outlook for record results in 2014, and continued non-GAAP profitability every year for the foreseeable future.
Here were the concluding thoughts in the Deep Dive post:
TTWO is only a $1.7 billion market cap company, even though it might be the leading video game publisher in the market today. The company’s past hiccups have hurt its reputation, but current business results and the future forecast are quite bright. If TTWO does indeed earn 1-3 dollars per share in the coming 2-3 years, this stock is significantly undervalued. We are considering it for addition to the long-term investment portfolio given what looks like asymmetric risk/reward to the upside.
Given our research and the overall valuation, we’ve been patiently waiting for a good entry on the stock for a longer-term position to express our view. On a long-term basis, the $16-$17.50 area (marked by green lines) is an important area of prior resistance that we expect to act as support:
On a shorter-term basis, the largest volume days ever since the Icahn announcement low over the past couple months have generally been on moves higher (volume circled in green below). In addition, the stock has fallen back to within 1% of its 50 day moving average, and is only 5% away from the rising 200 day moving average:
We bring all of the technicals up to explain why we decided to enter the long position today. However, we plan to hold the TTWO position for many months to let the valuation thesis play out, not as a short-term trade based on technical thoughts.
TRADE: Bought TTWO for $17.40
Earnings are in early February. We might provide an update to the position before then if we decide to do any protection or leverage structures in the options ahead of earnings.