Video game developer Midway Games (NYSE:MWY) made no excuses when it came to 2003 results and vowed to make amends. Third-quarter results, in which revenue increased 47%, proved the vow was heartfelt. For the full year, the company raised revenue guidance to $162 million -- a 75% increase over 2003.
Before investors start dancing in the streets, the company needs to search and destroy its unprofitable image. Guiding analysts to expect a $20 million loss for the year (and sugarcoating it by noting it's a $95 million improvement over 2003) is no help -- although the company expects to earn $17.5 million in the current quarter. That would be the first profitable quarter since the last quarter of 1999.
Unlike Motley Fool Stock Advisor recommendations Electronic Arts (NASDAQ:ERTS) and Activision (NASDAQ:ATVI), where annual net income is discussed in warm tones such as "how much higher," analyst estimates of Midway's future still show an annual loss for 2005.
The company has also been at the center of the Wall Street equivalent of a soap opera. Sumner Redstone, chairman of Viacom (NYSE:VIA), owns a majority of the company's shares. In a recent Viacom SEC filing, the company said it was looking to buy video game firms -- or to engage in licensing deals like it has with THQ (NASDAQ:THQI).
The prospect of a Redstone deal, and the purchase of video game developer Monolith Production by Motley Fool Stock Advisor recommendation Time Warner (NYSE:TWX), has certainly fueled the stock's 275% climb over the last 52 weeks.
The fundamentals underpinning the stock are worth noting. Selling for an extremely rich eight times sales, the company's latest quarter managed gross margins of only 3.5% (while industry giants have gross margins between 43% and 63%). Profitable Activision, with a cash hoard of $600 million and sales more than seven times greater than Midway, has a market capitalization of just more than two times sales.
The game console world of Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) is known for being a tough place to make a buck -- even for the big boys. This is not true for video game developers. Midway appears to be midway on its road to annual profitability (not there, yet headed in the right direction). But its extremely high valuation relative to its peers should keep the cap on the stock price.
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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.
