THQ Faces Tough Road Ahead
SAN FRANCISCO -- Video-game publisher
THQ
(THQI)
is fighting a tough battle to get back in the game.
Despite two big flops last year and missing analyst estimates in its recent earnings report, the company hopes to bounce back with games such as the action title
Saints Row 2
; the third-person shooter
Red Faction: Guerilla
; a off-road racing game
Baja
; and Wii-targeted releases,
Battle of the Bands
and
de Blob
.
At its gamers' day event last week, THQ showed off many of these titles to nearly 200 journalists.
The verdict? It was a good lineup, but nothing that blew away the audience. It also did little to quell concerns about THQ's ability to mount a successful comeback this year.
"2009 might be better year for them," says Jason Ocampo, editor-in-chief of IGN PC, a Web site that covers video games. "Their lineup was solid, but nothing really stood out."
Wall-E
, the THQ game based on a
Disney
(DIS) - Get Report
Pixar movie of the same name, could be a strong performer for the company, followed by
Saints Row 2
, though it could face some tough competition from
Take-Two's
(TTWO) - Get Report
upcoming
Grand Theft Auto IV
game, industry experts say.
Other titles such as the off-road racing game
Baja
could do well, but it's a niche play because the audience for the sport might not be large enough. Meanwhile, the company's Wii titles may have a tough go of it in a highly competitive market.
The misses could include
Red Faction: Guerilla
, a game that comes nearly five years after the second one in the series,
Red Faction II
, leading some industry watchers to question whether the long gap could make the series dated.
"THQ is going to have a tough time competing," says David Sandell, portfolio manager with Leeb Capital Management, which does not own THQ shares. "The competition is getting bigger and better, and they are really facing an uphill battle."
THQ CEO Brian Farell is optimistic. "We have a balanced portfolio of high-end games, licensed products and family and casual games this year that should help segment the market in a way that positions us attractively," he says. "Now we have to show we are executing."
Execution hasn't been easy for THQ.
Two of the company's most anticipated releases of 2007,
Stuntman
and
Juiced
, failed to grab gamers' attention.
And in the third quarter, the company saw
to $15.1 million from $62.1 million a year ago as it closed down one of its development studios.
The missteps have taken their toll on the company's stock; shares of THQ have fallen nearly 36% in a year. The stock closed up 42 cents, or 1.9%, to $22.64 Monday.
Rival
Activision
(ATVI) - Get Report
gained about 42% during the same period, while Take-Two, which is fighting
from industry leader
Electronic Arts
(ERTS)
, is up 23%.
THQ is hoping games such as
Saints Row 2
will help investors keep the faith.
The game, Farrell points out, has the potential to be a big hit. Its predecessor, the first
Saints Row
, sold 2 million copies on Xbox 360 alone.
"There's a legitimate chance that
Saints Row 2
will do at least the same," he says.
Saints Row 2
allows players to extensively customize their on-screen character and play the game in a co-operative mode, features that could make the title attractive to buyers, Ocampo says.
But
Saints Row 2
, scheduled for release on Aug. 26, faces tough competition. "Their problem is that they are coming out just a few months after
Grand Theft Auto IV
, which is expected to be the biggest blockbuster of the year," says Ocampo. "The question is whether gamers will be ready to play another action title in the same category as
Grand Theft Auto IV
?"
Though THQ showed off what it called a very early version of the game, or pre-alpha release, last week, gamers and journalists were quick to note that the graphics lacked the polish and flair that consumers have come to expect from the games industry.
"
Saints Row 2
did look rough," says Ocampo. "The original one looked good for its time but the bar has been raised now," he says. "They need to smooth out the graphics more."
The company may have better luck with a game based on Pixar's
Wall-E
.
Despite its efforts to create successful internally developed titles, the company's biggest hits have stemmed from licensed games, especially from the Pixar stable.
Cars
and
Finding Nemo
were big hits for THQ, though the
Ratatouille
game failed to please buyers and partly led to THQ's slide last year.
Wall-E
, which has a robot as its title character, could help revive THQ's fortunes, says Mike Hickey, an analyst with Janco Partners. "The robot theme should do better than a French cooking rat."
"THQ has had some near-term appreciation but at this point the upside is rather limited," says Hickey, who has a buy rating and a $25 price target on the stock.
Still,
Wall-E
and the company's stable franchises such as
Destroy All Humans
and
WWE Smackdown vs. Raw
may not be enough to help investors keep the faith even as the video games industry goes through consolidation.
THQ may find itself left out in the cold, says Sandell. "They don't have the kind of crown jewel that Take-Two has with
Grand Theft Auto IV
, which draws interest."
THQ CEO Farrell says investors need to look past the recent stumbles towards the company's long term record. "We have done it before and we can do it again," he says. "People tend to take a misstep as a trend."