Shares of video game publisher THQ Inc. (THQI: Charts, News), with its tiny $281.7 million market cap, fell last week after it reported a wider loss and decreased revenue, which still beat the Street’s pessimistic mean estimates. The company, which recently scored a hit with its first person shooter “Homefront,” has been increasingly marginalized by large publishers such as Electronic Arts (ERTS: Charts, News) (7.94 billion market cap) and Activision Blizzard (ATVI: Charts, News) (13.54 billion market cap), which can afford to acquire hot studios and impress audience with high production values.
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THQ reported an increased loss in EPS of $44.1 million, or 65 cents per share, a steep decrease from the $10.4 million in losses, or 15 cents per share, it posted a year ago. Revenue decreased 37.1% to $124.2 million. However, adjusted net income came in at 15 cents per share. The Street on average expected adjusted earnings of 11 cents per share, with a low estimate at 7 cents and high at 17 cents. THQ’s liabilities increased to $379.5 million from $206.3 million the previous year, and its revenue has declined an average of 19.1% year-over-year.
As Electronic Arts and Activision have been seen rising from the ashes of the consolidation of the video game market stronger and more unassailable, THQ is struggling to retain the interest of its core demographic of 18-35 year old male gamers, whose attention has been drawn away by expensive “AAA” titles such as Ubisoft’s Assassin Creed series, Electronic Arts’ Mass Effect series and Activision’s Call of Duty and World of Warcraft franchises. Even tiny Take-Two (TTWO: Charts, News), with its market cap of $1.39 billion, has cemented its “AAA” status with critically acclaimed and best-selling titles Grand Theft Auto IV and Red Dead Redemption.
Meanwhile, THQ had one “AAA” title – Homefront, a first-person shooter with high production values – developed by Kaos Studios and boasting a script written by A-list Hollywood screenwriter John Milius. Despite mixed reviews, the game sold 375,000 copies on the first day with an estimated 1 million copies sold across North America, Europe and the Asia-Pacific markets. The game’s reference to a fictional North Korean attack on South Korea and the United States struck a nerve in several Asian markets, leading the game to be censored in Japan and completely blocked in South Korea. Several foolish publicity stunts promoting the game also caused a PR backlash for the company. Prior to its release, THQ spread a viral “simulated declaration of war” across mainstream websites and media, which confused many gamers and non-gamers, then proceeded to “bomb” the San Francisco Bay with 10,000 balloons, which fell into the ocean, angering local residents. CEO Brian Farrell stated of Homefront, “THQ posted strong fourth quarter results primarily driven by the success of Homefront. We have already shipped 2.6 million units, a solid start for this new franchise, which kicks off the strongest pipeline of AAA core games in our history.”
THQ’s over-zealous promotion of Homefront is proof of the company’s desperation for a hit, franchise-making title, the kind of cash cow Activision CEO Bobby Kotick excels at nurturing. For 2011, the major franchises in THQ’s stable include Saints Row, a poorly received Grand Theft Auto clone; Warhammer, a well-received real-time strategy based on a table-top game; Red Faction, another first-person shooter in a crowded market; and the WWE wrestling games. None have evolved into the multi-million dollar franchise that rivals EA and Activision’s biggest hits. The company is also attempting to develop its uDraw game tablets franchise, developed for Microsoft’s (MSFT: Charts, News) XBOX 360 and Sony’s (SNE: Charts, News) PS3 platforms. Speaking of uDraw, Farrell stated, “We also continued to grow the uDraw franchise with the successful international debut of this compelling new tablet.”
In addition to seeking out new avenues of growth, THQ faces intensifying competition from new entrants such as Disney (DIS: Charts, News) as well as first party developers Sony, Microsoft and Nintendo. As the video game industry begins to consolidate, the larger players may eventually acquire the smaller players such as THQ and Take-Two. For now, THQ trades with a forward P/E of 10.17 and a PEG ratio of 0.72, and may be undervalued at current levels.
Other News About THQI
THQ and Adidas to Bring miCoach Interactive Training System to Video Game Consoles
THQ taps into the fitness craze with its new product.
THQ expands uDraw gaming tablet to Xbox 360, PS3
THQ hopes that the uDraw will catch on in the world of peripherals.
Other Stocks in the News
Microsoft’s Gaming Figures: Xbox 360, 50M Units; Xbox Live, 30M Members; Kinect, 8M Units
Microsoft is having better luck in the video game arena than in the mobile one.
Sony’s New Portable Least of Its E3 Problems
Sony’s weakness shows at E3.
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Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.
A two comments:
The past two titles of Red Faction have been 3rd person shooters.
You forgot to mention the UFC games, THQ’s biggest franchise.
You completely missed the mark on THQ. It’s like trying to compare Summit to Warner Bros. or HGTV to CBS. They had a solid success with Homefront, but you missed uDraw, a big hit for them, and their upcoming titles like Saints Row III and the just-announced Adidas partnership. They don’t need a 5 million seller, which you failed to grasp — and that is a huge upside. If they can perform marginally well, there’s a lot of solid potential there.
Sorry, but this is an impossibly dim view of a company that has a long way to get to its previous heights (when it actually out-valued ERTS) but is nowhere near ready to kick the bucket.