Very good post - I like a well-stated negative point of view and I believe a lot of what you say has merit. And, although it is infrequently mentioned on this board, I am sure that most THQ investors have mulled over all your points.
That said, there are a few things where I disagree with your logic and also a few things you overlook.
It is probably true that 1998 earnings would have been only around $.50 a share without WCW. I won't even make an argument about substitute games THQ could have done if they didn't have the license. In any event though, by the time THQ is done selling WCW titles (June 99), the incredible success of those games will have given THQ a war chest of close to $50 million to go out and pursue new titles. Even assuming they sit on the money and earn 10%, the interest alone would earn $.50 annually from here on. Take the $.50 they could earn without WCW plus the interest earnings and you have $1 per share without really doing much of anything. At today's price, this would yield a PE of 28, not exactly cheap, but not expensive by todays standards. Obviously THQ will not sit on the money, but in all likelihood, sign deals that make a better rate of return.
I don't debate a lot of your Quest statement, although there were tons of people saying that Quest would not be as big as it was either. A sequal to Quest will have the advantage of having an installed sale base of some level for the people who really liked the original game.
Your guesses on Rugrats are just that - guesses. I admit that I am in a minority who is still somewhat doubtful on the success of this first PSX title (but assume Gameboy will be very good) - who knows how the second might do. Rugrats main audience is TV - not movies. If you feel that a movie is necessary to get kids attention, you never watched an episode of the Mighty Morphin Power Rangers or read a Goosebumps book. The real question about Rugrats is the extent to which Sony and THQ can drive down the average age of the player.
I feel you underestimate significantly some of the potential for Gameboy, especially since the introduction of the new Color Gameboy. Gameboys are flying off the shelves and I still predict that A Bug's Life GB is going to be big. Sadly, we probably will never know to what extent due to expected flood of Revenge revenues this quarter which will dwarf all other revenue streams. In the future, THQ has Toy Story II and a solid relationship with Disney to ensure a steady stream of content. They won't all be winners (ala Mulan), but a very good source of stable profit.
As for the WWF, your assessment of the popularity of it versus WCW is simply not borne out by facts over the past 4 months. WWF has become more popular than WCW and has beaten WCW in the television ratings by almost 20% for the past several months. Based on zealot fans knowledge, it is likely in the near future that several of the WCW wrestlers will jump ship and go to WWF as well. Combine that with the retirement of Hulk Hogan and I'd say THQ's timing is pretty good once again. As for why WarZone sales have trailed off, I chalk most of it up to a relatively poor advertising campaign. THQ knows wrestling and the wrestling fan, AKLM was a newbie to the arena.
In regards to the JAKKS deal, it is very likely that THQ will not generate the same profits due to the sharing of profits as their WCW license generated. However, they have a proven commodity will likely still generate significant profit, combined with a long time frame to exploit the license. If WWF can even generate 1/3 of the WCW profits, we have another $.50 a year.
Finally, the video game markup has simply exploded this year. Playstation and Nintendo will have a huge installed base once the year is over and THQ has a lot of games which can continue selling. Devil Dice could become a cult hit. G Darius has a niche. Heck, I even saw Granstream Saga back on the shelf this last week after being gone for several months. Add to the that improved European distribution, the potential for GameFX, and THQ's excellent industry contacts and THQ is in excellent shape going forward.
Thanks again for a good, rational post, even though I disagree with many of your conclusions.
Kory |
