Ragas Report on Sat, 2 Jun 2001 03:44:57 +0200 (CEST)

[Date Prev] [Date Next] [Thread Prev] [Thread Next] [Date Index] [Thread Index]

[Nettime-bold] THE RAGAS REPORT- Electronic Gaming Stocks - Inside the Video Game Wars

Knowledge Capital For Next Economy Architects
Editor: Matt Ragas
"Now read by over 25,000 next economy leaders"

In This Issue  
  Commentary: Electronic Gaming Stocks: Inside the Video Game Wars
More Knowledge Capital: Sun, Vivendi Universal, Microsoft and Real
Quote of the Week: Sun's CFO Deals with a "Challenging Environment"

This Week's Commentary


Electronic Gaming Stocks: Inside the Video Game Wars

In the ongoing quest for finding the next big "new, new thing" electronic gaming stocks remain locked on the radar screens of some of Wall St.'s best and brightest.

And with good reason.

From Bill Gates and Microsoft to major media and technology giants like Sony and AOL, everyone seems to be jockeying for position in video game land these days.

No one wants to be left out in the cold.

Clearly, the days of the gaming business as simply a cottage industry serving computer nerds and pimply-faced adolescents are long gone.  Electronic gaming has gone mainstream.

In fact, new studies indicate that the electronic game sector could attract over 120 million players and be worth over $85 billion within the next five years.

That's one heck of a lot of Ben Franklins up for grab.

The much-anticipated launches of next generation gaming consoles from Nintendo (GameCube) and Microsoft [Xbox] later on this year, as well as enhancements to Sony's Playstation2, are only likely to further enhance interest in the sector.

Thus, I thought now would be as good a time as any to take a look under the hood at three of the industry's leading video game manufacturers.  Electronic Arts, Activision and THQ are under my analytical microscope for the week.

Now, let's see what I could find out:

Electronic Arts [ERTS]

Nearly every industry has its King Kong and Electronic Arts has clearly emerged as the undisputed 800-pound gorilla of the gaming market.  As the largest video game publisher in the U.S., EA is today home to such powerhouse video game titles as Madden NFL, 007 Racing and The Sims.  In addition, through an $81 million alliance with America Online [AOL], EA.com has emerged as a major force in the emerging online gaming market.

While Wall St. is already in love with EA's long-term prospects, sales only rose a piddling 4% to $307 million for the most recent quarter.  For the period, EA posted a loss of $17.9 million or 13 cents per share, a penny better than Wall St.'s estimates.  More importantly, though, the company announced that it expects its operating income to jump a sizzling 75 to 90 percent for its just begun fiscal 2002. Revenue growth for the year should grow in the mid teen range.

Even though EA seems to be the best positioned of the major game makers to profit from the expected gaming boom, the company's valuation is still nothing short of unsettling.  At its recent price of almost $59 per share, EA already sports a 2002 forward P/E north of 90 [based on expected earnings of 63 cents for the full year].  Throw into the mix any possible delays in the rollout of GameCube or Xbox, and EA shares get a big "warning sign" in my book.

Activision [ATVI]

As the second largest video game publisher in the U.S., Activision should continue to profit nicely from the console wars as well.  The company is most well known today for its Tony Hawk Pro Skater and Supercar Street Challenge titles, and for licensed properties such as Buzz Lightyear of Star Command from Disney [DIS].   Activision recently acquired the rights to develop a game based on the popular TV game show "The Weakest Link."

While EA has garnered most of the press attention lately, Activision has quietly turned in a solid financial performance.  Sales jumped 22% to $127 million in the most recent period, as Activision eked out a profit of $875,000 for the quarter. Quarterly earnings of 3 cents per share were 2 cents better than Wall St. had expected. But the good news didn't stop there.  Activision also raised its earnings per share estimates by 4 cents to 80 cents a share for fiscal 2002.

Thus, at a recent price of $34 per share, Activision checks in with a forward P/E of approximately 42 or so.  Still not exactly a cheap gaming play in my book.  More importantly, this looks like a stock that's already had its run.  After all, shares of Activision have been as low as almost $5 per share in the past year and are currently only a dollar or so away from their 52-week high.  Don't make the mistake of trying to catch a train that's already left the station.

THQ, Inc. [THQI]

While THQ still looks like a runt when compared to Electronic Arts, this is one mid-sized gaming publisher that is worth keeping an eye on.  Founded in 1990, THQ has emerged as the leading independent publisher of games for Nintendo's popular Game Boy platform.  THQ also has a series of new games set for release on the Xbox and GameCube consoles as well.  The company is perhaps most well known for its best-selling WWF and Rugrats gaming titles.

While Activision and EA pump our more new games each year, THQ has so far been able to pick its spots and hold its own.  While sales dropped 15% in the most recent quarter to $59.3 million, Wall St. still expects THQ to post sales growth of 8% for fiscal 2001.  Further, THQ currently anticipates full year earnings of between $1.35 and $1.45 per share.  Taking the mid-range of this estimate, THQ could realistically show earnings growth of 9% for the year.

With THQ currently trading at less than 3 times forward sales [compared to almost 5 times sales for EA] and a projected 2001 P/E of around 35, THQ is worth investigating further.  If analysts are on target [a big if always!], THQ's 2002 P/E should check in at around 27 with 25%+ earnings growth expected. Be warned, however, that at a recent price of $48.50, THQ shares have already risen almost 500% in the past 12 months.  Tread carefully.

Buy It Here!

More Knowledge Capital


SUN MICRO GROPING FOR THE ROPES: News on Tuesday that server giant Sun Microsystems [SUNW] was once again slicing its sales and earnings forecasts should have come as a surprise to no one.  Trying to make headway amidst a global IT spending slowdown is bad enough, but increased competition from NT and Linux based servers only make things look worse.  Finally, Sun is essentially being forced to compete with itself lately as Sun servers from failed dot coms are all over the grey market.

Taking this all into account, then, Sun now expects to earn between 2 and 4 cents per share in the fourth quarter, instead of the 6 cents per share that Wall St. was expecting.  Keep in mind that Sun earned 20 cents per share in the same period last year.  The company is expected to officially announce fourth quarter results on July 19th.  While the long-term growth picture for Sun clearly looks clouded right now, Sun chief Scott McNealy has dealt with greater challenges in the past.  As long as the Net grows, Sun grows.


MUSIC GIANTS GO BARGAIN BASEMENT SHOPPING: If the past few weeks have been any indication, the traditional media giants have decided that it now makes more sense to "buy" rather than "build" in the digital music arena.  Earlier this week, Bertelsmann paid $30 million for struggling music locker service MyPlay.com, while last week, Vivendi Universal scooped up MP3.com [MPPP] for $372 million.  The combination of MyPlay.com with Bertelsmann's CDNow and BMG Direct makes sense, just as the coupling of MP3.com with Vivendi's planned Duet subscription service looks like a winner as well.

My only real issue with all of these recent acquisitions is that it suggests that the major labels still somehow naively believe that they alone can go direct to the consumer.  As I've pointed out many times, only unified subscription or download services featuring music from ALL of the major labels will ever work.  The BMG and Universal names mean very little to consumers.  As much as the major labels may not like to admit it, large portal players like Yahoo, and trusted retail brands like Amazon.com will end up playing a dominant role in this game.

Buy It Here!

REAL NETWORKS WALKS THE TIGHTROPE: Shares of streaming media company RealNetworks [RNWK] were pounded this week, as rumors of enhanced partnership talks between AOL [AOL] and Microsoft [MSFT] hit the wires. According to published reports, as part of a larger deal to bundle the AOL service with Microsoft's upcoming Windows XP operating system, Microsoft now wants its Windows Media player technology to be included on the AOL online service as well.  Microsoft's Internet Explorer is already the default browser on AOL.

While AOL currently has a multi-year pact with RealNetworks to distribute its Real player on its online service, the exclusivity part of this deal ends this summer. Thus, the possibility of AOL supporting both Real and Windows Media in the near future wouldn't really surprise me.  Real responded this week by cutting a new distribution deal with Intel [INTC].  While I respect Real CEO Rob Glaser's valiant battles with Microsoft, his apparent unwillingness to find a merger partner can't be the most comforting thing for loyal RNWK shareholders.

Quote of the Week

"Without a doubt, it is a challenging environment out there. Being in the Internet is a good thing and will continue to be a good thing going forward."

-- Comments made this week by Sun Microsystems chief financial officer Michael Lehman after his company was again forced to lower its fourth quarter estimates.

June 1, 2001














































































Share this report with your friends, associates and colleagues. The subscription to the report is always FREE so pass it on or signup below!

TO SUBSCRIBE or UNSUBSCRIBE- Visit http://www.ragasreport.com/signup

ADVERTISING INFORMATION: Want to reach the movers and shakers of Web St. and Wall St. all in one place? Over 20,000 Next Economy leaders read our report each week. Get your marketing message in front of leaders- not followers! For advertising information please contact: AdRates@RagasReport.com.

Comments? Questions? Agree or disagree with our ramblings? Then we want to hear from you. In dire need of e-strategy and consulting services? Then contact us today: Matt@RagasReport.com.

About Matthew W. Ragas: Ragas is President and Chief Analyst of Matthew Ragas & Associates, an Orlando, FL based strategic advisory and venture development firm. He was previously the founding editor of Raging Bull and is the author of the new e-business book Lessons From the E-Front from Prima Publishing.

The RagasReport and Matthew Ragas and Associates, are not a registered Investment Adviser or a Broker/Dealer. Readers are advised that the report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The opinions and analyses included herein are based from sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied is made as to their accuracy, completeness or correctness. Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report should be independently verified with the companies mentioned. In addition, we receive no compensation of any kind from any companies that we mention in this report.

Copyright (c) 2000-2001, Matthew Ragas & Associates.
(http://www.ragasreport.com) All Rights Reserved.