What's Wrong With This Gaming Stock Today?

Majesco Entertainment (Nasdaq: COOL  ) investors are sweating today, and not because they're swinging their hips to Majesco's hit Zumba games. No, they're worried about their shares. Majesco's shares fell as much as 14% overnight as the company presented its first-quarter results.

GAAP earnings rose by a penny YOY, to $0.19 per share, on 36% higher sales. Majesco is pumping its increased revenue directly into growing the company, nearly doubling its product R&D budget from the year-ago period and boosting funding for the direct cost of working up new products by 140%. More specifically, the R&D costs are mainly going into new ideas on how to run social games for Facebook and the Apple (Nasdaq: AAPL  ) iOS platform.

That huge spike in software development costs came from an oddity in Majesco's accounting practices. The company records the development cost for each game as a cost of goods sold when the title hits the market. Lots of games were released for the holidays, hence the big jump in costs.

You can see more evidence of that by looking at the cash flow statement. $7.7 million of net income turned into $9.4 million of operating cash flows, up from $5.4 million a year ago. If you want to get a feel for how Majesco's business is really running, I believe you're better off looking at cash flows and revenue than earnings.

From that perspective, Majesco is doing more than fine. The $66.2 million in sales crushed every analyst's forecast, and Wall Street doesn't do cash flow estimates here but who's complaining about a 74% higher OCF?

If there's one weakness in Majesco's business today, it's the increasing reliance on Nintendo (OTC: NTDOY.PK) systems. Fully 86% of Majesco's sales came from the Wii and DS/3DS platforms this quarter, up from 72% a year ago. Zumba titles for the Wii keep driving this train as even the Kinect version for the Microsoft (Nasdaq: MSFT  ) Xbox 360 is getting less and less significant. The PlayStation 3 is about to join Majesco's "Other" category, which is on the rise due to games for iOS as well as for Android smartphones and tablets.

Gaming is going online and mobile in a big way, and I wouldn't mind owning Majesco as it taps into that huge trend. If I didn't already have a bullish CAPScall on Majesco, I'd start one on a silly drop like this one. This stock is hardly the easiest or most effective play on the smartphone market, of course -- for that, check out these three hidden winners of the iPhone, iPad, and Android revolution.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services have recommended buying shares of Nintendo, Microsoft, and Apple; creating a bull call spread position in Apple; and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors.


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