Use access key #2 to skip to page content.

Majesco Entertainment (COOL): Strong Buy or Short?

Recs

2

August 18, 2011 – Comments (1) | RELATED TICKERS: ATVI , EA , COOL

The following Fool article intrigued me enough to research "COOL."

http://www.fool.com/investing/general/2011/06/14/majesco-works-out.aspx

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?

 

 

1 Comments – Post Your Own

#1) On September 08, 2011 at 12:07 AM, RallyCry (< 20) wrote:

Zumba Fitness 2 should help to buttress the revenue decline in Zuba Fitness 1. I think a motion based Jaws where you are the shark could be a big hit. One tenet the company follows is that they target well known titles and builds them out into successful franchises.

The basic premise that the company trading at 6x 2012 estimates is undervalued is one I agree with, and I feel a price north of $4 is justified. See the top bull pitch.

 http://caps.fool.com/Ticker/COOL.aspx

Report this comment

Featured Broker Partners


Advertisement