Its stock symbol may be COOL, but the stock of video game company MajescoEntertainment (NASDAQ:COOL) cratered a downright uncool 55.6% in early-morning trading.
Shooting the stock down was news the company would post a loss for its current fiscal year, which ends in October. As recently as June 7, when record second-quarter results were released, the company expected fiscal 2005 revenue to be between $175 and $185 million and for operating earnings to blossom in a range of $16 to $18 million.
Well, cue the "dismemberment engine" from the company's Jaws movie-based video game. Tearing $12 million from the company's profit expectations were the bankruptcy of a customer, increased retailer price protection, provisions for impairments of capitalized costs, and severance costs. Taking a great white shark bite out of revenue and profits were substantially weaker sales across all the company's product lines. In addition, the company lowered revenue expectations to $120 to $125 million and posted an operating loss of $16 to $19 million for the full fiscal year.
Is it safe to swim in this company's water?
No longer swimming for the company is Carl Yankowski, who resigned as chairman and CEO. This move seems to make little sense, particularly given his rhetoric in the company's second-quarter earnings release. Yankowski positively positioned Majesco's prospects, anchoring expectations on several new premium game titles that are aimed at expanding market share. But the company also positioned itself for the upcoming hardware transition from video game makers Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT).
Falling sales, negative earnings, and a company without a CEO are hardly the 1-2-3 punch you want for an investment.
Nor do you want strong competition. Industry giant and Motley Fool Stock Advisor recommendation Electronic Arts (NASDAQ:ERTS) is up 100.1% since first being recommended in May 2002. Electronic Arts also has $3.1 billion in cash, trailing 12 month free cash flow of $366.5 million, and no debt. Still, the company lowered expectations for 2005 earnings in March.
The next two giants, although they have less than half the sales of Electronic Arts, have balance sheets that are rock-solid. Motley Fool Stock Advisor recommendation Activision (NASDAQ:ATVI) has $840 million in cash, trailing annual free cash flow of $259.3 million, and no debt. Analysts expect its 2005 earnings to increase slightly. Take-Two Interactive (NASDAQ:TTWO) is also debt-free with $210.2 million in cash. The company has posted negative $15.4 million in trailing annual free cash flow, but the company and analysts are very upbeat about its earnings future.
Contrast those giants with Majesco and its $16 million in cash, $3.1 million in debt, and negative $34.0 million in annual trailing free cash flow.
At this point, Majesco is a speculation. It will likely continue to burn cash. Building industry presence is not cheap: considers costs associated with the development of games, possible costs associated with attainment of valuable licensing arrangements for games, and general brand-name building. Furthermore, it's also unclear where the CEO-to-be will steer the company.
In my opinion, it's a game only suitable for players in a position to evaluate the company's development pipeline, and I myself can't be too sure.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here t o see the Motley Fool's ironclad disclosure policy.
