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Perry Rod




10/23/11 at 3:12 PM CDT



READ: 1022






Strong Buy

THQ Analysis: Time To Buy?

Last year, and for the last few years, I had been warning people to stay away from THQ Inc.  I have also been shorting THQI on and off for the last few years, making some nice profits.

First, when the current generation began, I warned that THQ was a "shovel-ware" game maker that would get destroyed by Nintendo's rise in the kids' game market.  In 2008, THQI lost 80% of its value as a result.

Then, in 2009 I warned that UFC could not become a consistent annual franchise.  I missed the rise in the stock price from UFC but THQ subsequently underperformed the market in both 2009 and 2010 as UFC's sequel failed to deliver.

In 2010 I warned that Homefront would not save THQ and Udraw would not sell during the non-holiday months.  Right again!  THQ hit a new low this year and bounced back only slightly, still at a price lower than at any other year this decade.

So I've been very critical of this company and this management.  I think maybe they ought to be thrown out, frankly.  But now I have gone long the company's stock.  Why?

Rockstar and Take Two get an 'epic fail' grade for not bringing out a sequel to mega-hit Grand Theft Auto this year.  In fact, GTA is starting to become irrelevant in people's minds with such a long delay.  Saints Row 2 was released only 6 months after GTA4 smashed records in 2008.  This time around, there is now direct competition in the genre for THQ's internal studio, Volition.

On, I compared the archived best seller ranking of Saints Row 2 against Saints Row 3 - Saints Row 2 hit the chart two weeks prior to launch ranked in the 60's.  One week prior, it hit the 30's.  Saints Row The Third hit the Amazon chart four weeks prior to launch in the 60's and now 30's, three weeks prior to launch.  And this is at a time when game competition is at its peak with titles such as Batman, Battlefield and Call of Duty hitting the market.  Does this suggest double the pre-sales this time around for Saints Row?

I had my doubts for years that Saints Row was a sustainable franchise.  But I think it is about to set itself apart as the funniest game out there, something sorely missing in the game industry.  It is also unique in being an expansive sandbox title, which has also absent since the last major sandbox title, Red Dead Redemption from Rockstar.  That title sold over eight million copies worldwide.

Since Saints Row The Third alone has the potential to bring in earnings and cash flow above the stock's current trading price, the stock may be seen as a cheap call option on sales of Saints Row.  If the game breaks out, the stock will likely go into flight, possibly quadrupling from here.  If the game performs just alright (let's say 3 million woldwide sales), the stock will probably still hold its value from here.  If the game bombs, which may be highly unlikely at this point, the stock would have significant downside risk.

In my view, Saints Row's success would be a long term win for THQ because it suddenly adds tremendous value as a long term dependable franchise that is no longer a 'GTA clone' as it was once called by myself and others.  The two titles have moved away from each other, moreso to THQ's benefit, while all the other publishers abandoned this genre (which is nuts since this is arguably the most mainstream genre of all).  I've always been critical of this company for having little in terms of successful internally owned IP, but a Saints Row The Third success can change all of that and make this a worthy long term holding.

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