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Mahyar Hashemi




06/09/09 at 2:58 PM CDT



READ: 996






Strong Sell

THQ Unloads a Powerful Punch at E3

Since the start of the E3 Expo in Los Angeles last week, THQ stock has soared nearly 27% as of midday trading today.

Investors must have been impressed.  THQ showed off Darksiders, Homefront and Warhammer, along with current releases Red Faction and UFC Undisputed.  THQ stock hit a low of $2.23 this year as analysts questioned whether or not THQ had a sustainable future.  Those questions have been somewhat silenced ever since UFC Undisputed hit the market and shipped two million copies, according to THQ's CEO Brain Farell.

However, some questions have been left unanswered.  For example, how significant is THQ's cut in the profits for UFC?  Profits are shared with both the developer and the license holder according to analysts and the company has provided little guidance.  Also, can UFC be a viable annual franchise given the nature of the sport?  Electronic Arts, for example, plans to release its hit boxing game, Fight Night, only once every other year for fear that buyers will not purchase the game every year.  EA also has plans to release a mixed martial arts game of their own every other year to compete with the UFC title, whose license with THQ runs through 2011.

Meanwhile, THQ's licenses with Disney and Pixar seem to be near an end as Disney's video game division has begun developing their own titles, including one for their upcoming sequel to Toy Story.  In the past, THQ's profits came primarily from these children licenses.  There has also been some question as to whether or not the WWE license agreement will be renewed given the two company's recent legal battles.

With questions about licensed properties in the background, THQ has attempted to focus more on internal properties such as Saints Row, Darksiders, Red Faction and Homefront.  But it's unlikely that hopes for those properties are the primary catalyst for the company's stock price increase.  Rather, like a biotechnology company whose drug has taken off, there's hope that UFC profits are high and that THQ will make significant profits from it year after year.  But perhaps investors ought to consider that the title as a successful annual franchise is completely untested, and investors ought not to forget that the UFC title belongs to UFC first, and THQ a distant second.

Disclosure: short THQI, long ERTS

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