THQ Bull's Pen
David Haines ([email protected])

THQ develops, publishes, and distributes video games for all of the major gaming platforms including Nintendo, Sony, Sega, and the PC. Its business strategy focuses on providing high-quality games based on proprietary or exclusively licensed content for all economically feasible platforms while maintaining the strictest of inventory and cost control measures. This conservative business strategy has given THQ twelve consecutive quarters of dramatically improved revenues and earnings growth since new management took over the company in 1995.

Retail sales of video games hit an all-time high of $5.5 billion in 1997, according to NPD Group, a market research organization. This represents a 51% rise from 1996. NPD states that “sales for video game products, especially software, should be strong in 1998 as consumers look to satisfy their desire for exciting game play.” Most analysts are predicting strong growth for the industry right through the year 2000. “We’re in the largest, longest and most profitable video game cycle ever,” states Larry Marcus, an analyst at BT Alex. Brown.

THQ stands to benefit greatly from this explosive growth in the industry. During Q4 1997, THQ reported revenues of $48,903,000, up 139% from Q4 1996, and earnings of $6,203,000, or $0.84 per share, up a staggering 512% from Q4 1996. For the year, THQ reported revenues of $89,362,000, up 78% from 1996, and earnings of $9,345,000, or $1.35 per share, up 246% from 1996.

This dramatic increase in both revenues and earnings was the result of several top-selling THQ games, most notably, WCW vs NWO for the new Nintendo 64 game platform. This game (based on Turner’s top-rated World Championship Wrestling program) allows four players to wrestle simultaneously against each other with incredibly realistic 3D graphics. It was the best-selling third party Nintendo game during December according to TRSTS (a division of NPD Group that tracks retail sales of video games each month), and sold over 450,000 units in less than two months.

THQ released several other top-selling games during 1997, including Pax Imperia (a PC space strategy game that allows 16 players to play in real time over the Internet), Ghost in the Shell (based on the world’s most popular Japanese anime video), VS (an incredibly fast street fighter game), Jurassic Park: The Lost World (per a licensing deal with Universal), and several games for Nintendo’s portable Gameboy platform, including Toy Story, Pocahontas, Aladdin, Lion King, and Hercules (based on exclusive licensing deals with Disney).

THQ’s CEO Brian Farrell states, “With the expected continuing growth in sales of both Sony PlayStation and Nintendo 64 hardware, coupled with our impressive product line, 1998 is shaping up to be a year of excellent growth in revenue and earnings.” THQ has already started 1998 out strong by releasing WCW Nitro for Sony PlayStation in early January. This game has been a top seller at many retail outlets. For the remainder of 1998, THQ has announced over 30 titles including WCW Thunder (based on Turner’s popular new show on TBS) and Quest 64, a highly anticipated fantasy/adventure game for the Nintendo 64 system.

THQ has also announced several games based on Disney’s upcoming expected blockbusters, including Mulan and A Bug’s Life (from Pixar, the creators of Toy Story). Add to this the rumored games not officially announced yet, including Toy Story 2, Granstream Saga (debuted number one in Japan), Small Soldiers, Yoda Stories and three recently announced games based on Nickelodeon’s award winning Rugrats show for children, and THQ should have another outstanding year.

THQ trades at a significant discount to some of its competitors in the industry. Electronic Arts <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERTS)") else Response.Write("(Nasdaq: ERTS)") end if %> routinely trades at 35 times earnings and 3 times sales. THQ trades at roughly 18 times trailing earnings and 2 times sales. Analysts have consistently been too low with estimates each quarter. The highest estimate for THQ’s last quarter was for $0.50 a share and THQ beat that by 68%. For now, analysts expect THQ to earn only $0.14-$0.18 cents for the current quarter, which appears too low, in my opinion, considering how well WCW Nitro is selling. I am most certainly bullish on THQ and see the stock trading at $45 by the end of the year, if not higher. The stock is currently around $30.

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