Halloween Trick: Atari

Let me be up front: I want to like Atari's (Nasdaq: ATAR) stock. The company brings back memories of many a summer night I spent with the Atari 800XL, back when you could type in BASIC programs from periodicals like Antic. But alas, the Magician is not in the tarot cards for this company; the only card Atari is drawing is Death, the equestrian skeleton.

The first thing that strikes a potential investor about Atari's stock is its price. As I write this, the stock is trading around $1.30 per stub. Now, I understand that price is a controversial issue with a lot of folks, so let me make something clear: I am not suggesting you stay away from a potential investment vehicle solely on the grounds of its price. However, understand that stocks trading for less than five bucks a share might be trading that way for a reason, and you should definitely dig deeper before buying. Atari's dollar-something share price automatically confers a frightening volatility -- traders tend to be in and out of these stocks on a moment's notice, and unless you have the speculative stomach for that, stay as far away from very low-priced stocks as you would from Michael Myers' house on All Hallows' Eve.

We know Atari is cheap in an absolute sense, but its earnings record can also induce nightmares. Let's look at the company's first-quarter results for fiscal 2006. Revenues from continuing operations declined 78% to $24.2 million, and a net loss from continuing operations of $30.5 million ($0.25 per share) was recorded against net income of $14.1 million ($0.12 per share) in the year-ago period. This has been the trend since February through the fourth quarter of FY 2005.

For those who read Investors Business Daily, I feel compelled to point out that Atari receives extremely low ratings for earnings, sales growth, and return on equity. Can I frighten you more? According to its latest 10K, Atari had $61 million in operating cash flow from continuing operations for 2003. In 2004, that figure dropped to $14 million. In 2005, the cash turned into a negative $2 million. Terrifying.

One of the biggest problems with Atari is its portfolio. While companies like Activision (Nasdaq: ATVI), Electronic Arts (Nasdaq: ERTS), and THQ (Nasdaq: THQI) have incredible franchises, Atari just doesn't measure up. The company does have some big names in its portfolio, such as software based on movie phenomenon The Matrix, but game lines like Madden and The Sims from EA, Grand Theft Auto from Take-Two Interactive (Nasdaq: TTWO), and a whole host of valuable licenses over at Activision and THQ have been more valuable to shareholders. Atari's lack of proper pipeline management is a slow but sure poison in the veins.

Remember the Atari 2600 cartridge Haunted House? That, unfortunately, is what Atari has become -- a ghoulish abode which you enter only to be scared out of your wits. For the time being, I'd stick to the blue chip names like Activision and EA, and let some other unfortunate soul move into this house of horrors.