Factors Beyond THQ's Control

A company can execute properly but fall victim to factors beyond its control.

Shares of video game publisher THQ (Nasdaq: THQI  ) fell 6% to $22.12 yesterday, partially because of an analyst downgrade, but mostly because of Tuesday's announcement that Pixar Animation Studios (Nasdaq: PIXR  ) and partner Disney (NYSE: DIS  ) had decided to delay the release of the animated movie, Cars, until June 2006, versus November 2005. Pixar and Disney's announcement likely means that the release of THQ's video game based on the movie will also be delayed, pushing back earnings for THQ.

The issue here is that the one area where THQ truly has a competitive advantage is with its licenses of properties owned by Pixar, as well as Viacom's (NYSE: VIA  ) Nickelodeon. Games based on The Incredibles and Nickelodeon's SpongeBob SquarePants movie represent two of the main highlights of THQ's holiday lineup. That said, it is no small deal when a company has one of its big sales drivers eliminated from next year's holiday lineup.

There are several investment realities being illustrated here.

The first is that with a smaller video game publisher, it might take only one or two hits to provide significant upside, which is the main reason I generally prefer smaller companies. The second is that, because of that very actuality, a smaller company will react more strongly to the delay of a single game than a larger company with a more diverse lineup, such as Electronic Arts (Nasdaq: ERTS  ) , will. Lastly -- and perhaps most relevantly -- this occurrence shows the importance and relative safety of controlling your own properties.

Just imagine if Take-Two Interactive (Nasdaq: TTWO  ) had to delay the release of Grand Theft Auto: San Andreas, or if Microsoft (Nasdaq: MSFT  ) was forced to push back Halo 2 because of a third-party movie release.

THQ shares had been on a roll, climbing from about $17 to $24 over the past two months, before Tuesday's announcement. Despite the delay of Cars, it should be noted that THQ has moved to develop more of its own properties, and I still believe that THQ is one of the more solid players in the game.

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Fool contributor Jeff Hwang owns shares of Electronic Arts.


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