This Gamer Stinks

By Rick Aristotle Munarriz | More Articles
February 3, 2011 | Comments (1)

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EA giveth, but THQ (Nasdaq: THQI ) taketh away.

A better than expected quarter out of Electronic Arts (Nasdaq: ERTS ) may have boosted makers of video games yesterday, but THQ is raining on the parade today after hosing down its guidance for the current quarter.

Yesterday was great for investors in the country's leading gaming stocks. EA's stock soared nearly 16% on the news, but coattail hoppers THQ and Take-Two Interactive (Nasdaq: TTWO ) cranked out gains of 7% and 5%, respectively. Industry leader Activision Blizzard (Nasdaq: ATVI ) was up a pedestrian 0.3% on the day, but even that was enough to beat the flat averages. GameStop (NYSE: GME ) was the only loser in the lot, but the nearly 4% dip makes sense. EA's strongest gains came from digital distribution, a move that nudges the small-box retailer closer to the elephants' graveyard.

THQ's fiscal third quarter wasn't that bad. Non-GAAP revenue dipped 9% to $323.1 million, but an adjusted profit of $0.37 a share was ahead of both the $0.35 a share it mustered a year ago and the $0.26 a share that analysts were expecting.

THQ shipped 1.2 million of its uDraw tablets for the Wii. This will open the door for the sale of THQ games that are uDraw-compatible such as the Pictionary title that was available at launch. THQ also shipped 2.7 million copies of WWE SmackDown Vs. Raw 2011, the latest installment in its lucrative licensing deal with World Wrestling Entertainment (NYSE: WWE ) .

The pain comes from its outlook for the year's final quarter, where THQ is hosing down expectations. The gamer blames the projected shortfall partly on bumping the release of UFC Personal Trainer until the new fiscal year that starts in April.

It's a scapegoat.

Over the past few quarters, THQ has been bragging about meeting or exceeding guidance, only to talk down the current quarter. Get it? The stairwell is still heading lower, regardless of where it plants its feet.

THQ's new outlook calls for a non-GAAP loss of $0.25 a share to $0.35 a share on no more than $815 million in revenue. Just three months ago, THQ figured it would post an adjusted deficit of no more than $0.20 a share on $825 million to $855 million in revenue.

In short, every piece of good news out of THQ seems to be more than offset by even worse news. There's promise in the uDraw, but year-over-year revenue still tanked. Any points scored in exceeding guidance for the third quarter are more than subtracted by a fourth quarter so bleak that THQ needs to take a fire hose to its guidance for fiscal 2011.

THQ isn't playing to win: It's playing to lose less. Shareholders deserve better than that.

Is this a sector worth buying into as a turnaround or is it in a funk for a lot longer? Share your thoughts in the comment box below.

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Take-Two Interactive Software is a Motley Fool Rule Breakers selection. Activision Blizzard is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. Motley Fool Options has recommended writing covered calls on GameStop. The Fool owns shares of Activision Blizzard, GameStop, and Take-Two Interactive Software. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz will admit to still playing video games, though finding time is the rub. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Report this Comment On February 03, 2011, at 5:02 PM, Varchild2008 wrote:

"GameStop (NYSE: GME) was the only loser in the lot, but the nearly 4% dip makes sense."
What about KONGREGATE and JOLT?
(GME)'s drop made ZERO SENSE!!!!
Especially ahead of the release of the Nintendo 3DS which will sell like unebelievable hot cakes.

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