A Come-from-Behind Winner in Video Games?


By Gene Marcial Whether or not you're an avid video-game afficionado, you would have done mighty well recently in buying shares of the top game makers, which have been sizzling. The challenge at this point is figuring out which ones are still hot -- and still promise giant returns.

Shares of Electronic Arts (ERTS), for one, have already surged from 30 a year ago to 60 on June 5, and THQ Inc. (THQI) has bolted from 9 to 50. And there's Activision (ATVI), whose stock has charged up from a mere 5 a year ago to 35 in the same period. Another video-game maker, Take Two Interactive Software (TTWO), has also ramped up rapidly -- from 8 on November 11, 2000, to 20 by June 5.

But the group has one laggard that some pros say deserves investor attention now: Midway Games (MWY). Its stock is still priced at a level where it could further blossom given its depressed market-capitalization, low valuation relative to its high-flying peers, and the huge market potential of its new and up-and-coming products.

CATCHING UP. Midway Games is a Big Board-listed maker of interactive entertainment software that's played in both the home and arcade markets. Until this year, the stock had lagged behind those of its video-game peers. It did make up some lost ground this year, running up from 6 a share on October 12, 2000, to 12 on June 5.

Despite this recent upward rush, some analysts say Midway's stock still trails the pack. Analyst Stephen Tam of UBS Warburg, who has upgraded Midway from a hold rating to a strong buy, has a new price target of 18 a share -- or 25 times his estimated 2002 earnings of 70 cents a share, on estimated revenues of $327 million. For 2003, Tam expects earnings to rise to 95 cents, on sales of $407 million. The company is expected to lose 89 cents in 2001, on estimated sales of $122 million. MidWay's current market cap is $474 million.

Compare that with Electronic Arts, which sports a market cap of $8.3 billion. EA posted revenues of $1.3 billion in fiscal 2001 and trades at a price-earnings ratio of 97. And THQ, which has a $1 billion market cap and sales of $347 million in 2000, trades at a 47 p-e. Activision's market value is $923 million, with sales in fiscal 2001 of $620 million and a 43 p-e. And Take-Two Interactive, with 2000 sales of $387 million, trades at a 20 p-e and has a market cap of $679 million.

MAJOR HITS? Tam expects MidWay to post two more weak quarters, those ending in June and September. After that, the analyst expects it to get back on track and to post a "breakthrough year" in 2002. He says the company will have 31 new products from late summer of 2001 through the end of 2002. Some of them, he predicts, will be major hits, including Spy Hunter, Mortal Kombat 5, Defender, and Arctic Thunder. The company recently completed a $42 million financing that the analyst says will fund and expand Midway's business into 2002 and 2003.

Since the late 1970s, the company has produced many of the industry's leading video games, including Mortal Kombat (more than 17 million copies sold), PacMan, Space Invaders, and NFL Blitz.

MidWay's revenues should be strengthened by its "healthy game-development pipeline," says Markos Kaminis, analyst at Standard & Poor's Corp. He notes that MidWay has 30 titles in progress for the new video-game platforms, including Microsoft's (MSFT) Xbox, Sony's (SNE) PlayStation 2, and the coming machines from Nintendo. MidWay's profit margins should improve this year, he adds, as revenue growth starts to outweigh the company's heavy spending on research and development.

Some of the CEOs in the video-game business, including Kelly Sumner, who heads Take-Two Interactive, acknowledge that a wave of consolidation will engulf the industry over the next two years. If that should prove true, another Sumner --specifically, Viacom Chairman and CEO Sumner Redstone, would be delighted: He owns some 28% of MidWay. And he has continued to quietly buy more shares. Investors looking to score may starting doing the same. Marcial is BusinessWeek's Inside Wall Street columnist


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