As some readers of this blog know, one of my great investment loves is the video-game industry. I consider my bearish call on THQI in 2007 to be the single best stock pick I’ve ever made, as I was way ahead of Wall Street in predicting the company’s collapse, getting investors out of the stock above $30.
But with the stock under $8, I’m changing my tune and I just went long. Here’s why.
THQ has a whopping $332 million in cash and investments on its balance sheet, equating to nearly $5 a share. Even if the company missed FY2010 (12 months ending March 2010) sales expectations by 20%, you still have a valuation of less than 0.2X sales!
This cheap valuation more than reflects the likelihood of THQ losing its Disney-Pixar and Nickelodeon licenses, and extremely low investor expectations. And it’s simply incredible for a stock trading around ~$7.50, and for a company which will almost definitely return to positive free cash flow this year.
I do expect THQ to retain its WWE (WWE) wrestling license given the outstanding success THQ has had with the property. Also, let’s not forget that THQ will release its first game under its Ultimate Fighting Championship license, UFC 2009 Undisputed, next year.
Here’s a look at the game:
And if you haven’t been following the sport of mixed martial arts (MMA), the UFC is the only game in town as competitors like EliteXC and the International Fight League have recently gone out of business. At the same time, questions surround the ability of rivals like Affliction to survive in a weak economy.
The UFC’s pay-per-view business is bigger than that of the WWE and boxing, and mainstream media coverage of the UFC is only increasing. Sports media outlets like ESPN and Sports Illustrated are dramatically boosting their coverage of MMA, and even CNBC is in the mix, having produced a special on the UFC earlier this year.
So don’t be surprised if UFC 2009 Undisputed turns out to be a multi-million unit seller next year. My only concern with the UFC license is that the agreement lasts only through 2011, but assuming THQ can replicate the success it had with the WWE license, I’m sure the UFC’s parent company Zuffa would stick with THQ.
And while I tend to roll my eyes at the idea of buying a supposed takeover target, I also now consider THQ to be the perfect prey for a larger video-game company, particularly Electronic Arts (ERTS). EA has the money to do the deal, and more importantly, it would find THQ to be a great strategic fit:
1) The UFC license would be the perfect addition to EA Sports
2) Saint’s Row would give EA a competitor to Take-Two’s (TTWO) Grand Theft Auto
3) EA’s marketing muscle could help pump up THQ franchises like MX vs. ATV and Company of Heroes
4) EA could eliminate THQ franchises like Frontline that compete with its own titles
5) A lot of waste in THQ’s studio systems could be eliminated
So add it up, and you see why I changed my tune THQ, and why I’ll likely buy more as the year goes on!
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