There's no shortage of buzz surrounding video game developer Midway
The game developer is up to its neck in red ink, with a losing streak that goes all the way back to the final quarter of 1999. Analysts expect the company to keep extending that unhappy record for at least the next two quarters, with net income losses predicted through 2006.
What about its supposed big-media ally? Midway has struck a few deals with Viacom, including one with MTV for soundtrack advice and in-game advertising. But it's also made agreements with competitors, like its series of Cartoon Network-based games with Motley Fool Stock Advisor pick Time Warner
Midway says it is excited about its 2006 and 2007 product offerings. But business realities caught up with the company last Friday, when it announced an 8% to 11% reduction in its global workforce. Its product development divisions will be spared in these cuts, but the move made it clear that to become profitable, the company needed to reduce its costs.
Throughout the video game industry, the holiday season has not been as robust as expected. The stocks of industry giants and Stock Advisor recommendations Electronic Arts
With all this bad news, why did Midway's stock hit a 52-week high a month ago? And why has it managed to remain close to that level until today?
I can only see one reason: Call it the Sumner effect. Recent quarterly revenue growth may have been a positive 74%, but the resulting decrease in red ink is only a virtue if profitability is in sight. I don't see that happening any time soon. The recent staffing reductions may explain Midway's nearly 6% drop in share price today. But on a larger scale, the drop may also represent investors' increasing doubts about Midway's valuation and long-term potential for profit.
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