|
Electronic Gaming Stocks: Inside the Video Game
Wars
In the
ongoing quest for finding the next big "new, new thing"
electronic gaming stocks remain locked on the radar screens of
some of Wall St.'s best and brightest.
And with
good reason.
From
Bill Gates and Microsoft to major media and
technology giants like Sony and AOL, everyone
seems to be jockeying for position in video game land these
days.
No one
wants to be left out in the cold.
Clearly,
the days of the gaming business as simply a cottage industry
serving computer nerds and pimply-faced adolescents are long
gone. Electronic gaming has gone mainstream.
In fact,
new studies indicate that the electronic game sector could
attract over 120 million players and be worth over $85 billion
within the next five years.
That's one
heck of a lot of Ben Franklins up for grab.
The
much-anticipated launches of next generation gaming consoles
from Nintendo (GameCube) and Microsoft [Xbox]
later on this year, as well as enhancements to Sony's
Playstation2, are only likely to further enhance interest in
the sector.
Thus, I
thought now would be as good a time as any to take a look
under the hood at three of the industry's leading video game
manufacturers. Electronic Arts,
Activision and THQ are under my analytical
microscope for the week.
Now, let's
see what I could find out:
Electronic Arts [ERTS]
Nearly
every industry has its King Kong and Electronic Arts has
clearly emerged as the undisputed 800-pound gorilla of the
gaming market. As the largest video game publisher in
the U.S., EA is today home to such powerhouse video game
titles as Madden NFL, 007 Racing and The
Sims. In addition, through an $81 million alliance
with America Online [AOL], EA.com has emerged as a
major force in the emerging online gaming market.
While Wall
St. is already in love with EA's long-term prospects, sales
only rose a piddling 4% to $307 million for the most recent
quarter. For the period, EA posted a loss of $17.9
million or 13 cents per share, a penny better than Wall St.'s
estimates. More importantly, though, the company
announced that it expects its operating income to jump a
sizzling 75 to 90 percent for its just begun fiscal 2002.
Revenue growth for the year should grow in the mid teen
range.
Even
though EA seems to be the best positioned of the major game
makers to profit from the expected gaming boom, the company's
valuation is still nothing short of unsettling. At its
recent price of almost $59 per share, EA already sports a 2002
forward P/E north of 90 [based on expected earnings of 63
cents for the full year]. Throw into the mix any
possible delays in the rollout of GameCube or Xbox, and EA
shares get a big "warning sign" in my book.
Activision [ATVI]
As the
second largest video game publisher in the U.S., Activision
should continue to profit nicely from the console wars as
well. The company is most well known today for its
Tony Hawk Pro Skater and Supercar Street
Challenge titles, and for licensed properties such as Buzz
Lightyear of Star Command from Disney
[DIS]. Activision recently acquired the rights to
develop a game based on the popular TV game show "The
Weakest Link."
 While EA has garnered most of the press
attention lately, Activision has quietly turned in a solid
financial performance. Sales jumped 22% to $127 million
in the most recent period, as Activision eked out a profit of
$875,000 for the quarter. Quarterly earnings of 3 cents per
share were 2 cents better than Wall St. had expected. But the
good news didn't stop there. Activision also raised its
earnings per share estimates by 4 cents to 80 cents a share
for fiscal 2002.
Thus, at a
recent price of $34 per share, Activision checks in with a
forward P/E of approximately 42 or so. Still not exactly
a cheap gaming play in my book. More importantly, this
looks like a stock that's already had its run. After
all, shares of Activision have been as low as almost $5 per
share in the past year and are currently only a dollar or so
away from their 52-week high. Don't make the mistake of
trying to catch a train that's already left the station.
THQ, Inc. [THQI]
While THQ
still looks like a runt when compared to Electronic Arts, this
is one mid-sized gaming publisher that is worth keeping an eye
on. Founded in 1990, THQ has emerged as the leading
independent publisher of games for Nintendo's popular Game
Boy platform. THQ also has a series of new games set
for release on the Xbox and GameCube consoles as well.
The company is perhaps most well known for its best-selling
WWF and Rugrats gaming titles.
While
Activision and EA pump our more new games each year, THQ has
so far been able to pick its spots and hold its own.
While sales dropped 15% in the most recent quarter to $59.3
million, Wall St. still expects THQ to post sales growth of 8%
for fiscal 2001. Further, THQ currently anticipates full
year earnings of between $1.35 and $1.45 per share.
Taking the mid-range of this estimate, THQ could realistically
show earnings growth of 9% for the year.
With THQ
currently trading at less than 3 times forward sales [compared
to almost 5 times sales for EA] and a projected 2001 P/E of
around 35, THQ is worth investigating further. If
analysts are on target [a big if always!], THQ's 2002 P/E
should check in at around 27 with 25%+ earnings growth
expected. Be warned, however, that at a recent price of
$48.50, THQ shares have already risen almost 500% in the past
12 months. Tread carefully.
 | 
