Majesco Entertainment (COOL): Strong Buy or Short?
The following Fool article intrigued me enough to research "COOL."
I did a bit of initial research on the stock and am hoping for others with a bit more knowledge of the company to help chime in as I continue to research this. I think it could potentially be a huge opportunity to grab a slice of several of the fastest growing segments in gaming (motion-based, social, and family-oriented) for less than $100 mm (which is less than 1X sales with solid BS, and incredible growth that is already profitable).
Here are some things that concern me however:
-The company doesn't seem to have any stickiness in its business model. A few titles make up almost all of its revenues. For example, the Zumba Fitness game comprised 77% of revenues in the latest quarter. One game. 77% of revenues. That's a huge risk. I could potentially see this as a fad that wipes away 77% of revenue.
-They don't actually develop any of their games, but instead rely on third-party developers. Is there really any competitive advantage in this business? It may not matter at this valuation if they are able to continue to ride the Kinnect/ fitness game wave, but it is still an incredibly important question that determines, at the very least, the timeframe of how long to hold it (if it is determined a buy).
-10% of revenues in the latest quarter were from games on the Nintendo DS platform. As further evidence for their constantly changing business model, sales from this platform were 73% of sales in the qtr the previous year. Nintendo DS Nintendo just doesn't sell well these days. They seem to have been left behind in the latest gaming wave. Their new 3-D device has been a huge dissapointment. This dissapointment could have meaningful effect on Majesco.
-Their CEO sold half of his stake in the company in an open-market disposition on June 20 at $3.02. The stock is down a good deal since then, but it's never a good sign to see suge a huge dump like that. Doesn't exactly inspire confidence.
- The company acquired Quick Hit, a social gaming company, in June for just under $1 million. It seems like this was just a talent grab to acquire the 12-person team of Quick Hit that is well-versed in social gaming micro-transactions. My initial reaction to this is that it seems like a smart move as it could really help improve both their current social offerings and also their future ones. For more info on this, go here: http://blog.games.com/2011/06/10/cooking-mama-majesco-buys-quick-hit-social-game/
The company's stock has increased 300% in the past year, grew revenues by 200%, upped full year guidance, and is making moves in the social gaming space. I think Kinnect will continue to be strong, Nintendo will fall off a bit. It's tough to really model any long-term valuation due to their constantly changing business model-- and their reliance on a few number of hits. However, if they can continue to adapt to the market and operate in the high-growth segments of gaming, it is pretty interesting at less than 6X EBITDA.
Does anyone have any thoughts on COOL?