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HolidayBuyer's Guide
Tech Industry

2HRS2GO: Not even growth draws attention to games

The stock market must be frustrating for computer game makers nowadays.

They've generally boosted revenues and earnings reliably (Ok, Acclaim missed by a wide margin in the May quarter, according to I/B/E/S International. But it was an aberration compared to the company's overall performance for the last four quarters), yet their stocks -- with the notable exception of industry leader Electronic Arts -- have been in a holding pattern or worse all year (see comparison chart). Things aren't any different today: Acclaim reported profits a penny ahead of First Call estimates with another quarter of steady revenue growth, and Wall Street chipped 6 percent from the stock's already deflated price.



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All the traditional metrics improved for Acclaim in the fourth quarter. Gross margin of 58.8 percent represents improvements sequentially (54.1 percent in the third) and year-over-year (56.4 percent in the fourth quarter of 1998). Revenues increased by 20 percent. Net income rose 35 percent.

You would think the market would smile on those results, particularly since they represent a turnaround from the May quarter's letdown. It's not as if Wall Street firms haven't tried their darnedest to push this stock; four of five analysts following Acclaim recommend it with some kind of "buy" rating, according to Zack's Investment Research.

Acclaim's business has much in its favor. The company seems primed for the holiday season, with a stable that includes games for well-known media franchises such as the NBA, WWF, NFL Quarterback Club and the South Park TV show. And the success (at least for now) of the recently released Sega Dreamcast platform would seem to bode well for Acclaim, particularly since the company has gone after that market more aggressively than some rivals.

Among internally-created titles, the Turok line of shoot-'em-up games for the PC remains healthy and at least one new title, Shadow Man, has been well-received. More impressive, Acclaim gets more than 80 percent of its revenue from its own brands, so even if it loses one of the Big Media names, the bottom line shouldn't ache too badly.

Perhaps the market fears competition from the likes of Mattel and Hasbro, since traditional game and toy giants view software as a venue for expansion. It's hardly anything to worry about, since the toy and box crowd tends to go for a rather different audience than hardcore PC and console gamers. Can you imagine Mattel producing a bloodbath like Turok? Yeah, sure, and Disney World will install a Red Light District next to Main Street USA. Not likely.

With Playstation 2 coming out next year, game companies like Acclaim stand to do even better. Maybe people will start paying attention then, but it never hurts to get a head start, especially at these stock prices.

Intel

Investors seem skeptical about Intel's latest diversification plan, since shares of the chip giant are down slightly in mid-afternoon trading. There's reason for doubt.

Intel has the right idea in reducing its reliance on the gradually maturing PC market. But a good strategic move doesn't translate into a positive picture for the stock market; these acquisitions muddle the picture for shareholders, most of whom own Intel stock precisely because they want exposure to the PC field. If you want to invest in networking or wireless, there are purer plays to be had.

Even if that weren't the case, investors still have to consider Intel's record outside of PC chips. The company's history looks like the chart of a one-hit wonder, albeit with a tune that's lasted at the top of that chart forever. Intel won the lottery when it landed the processor slot for the original IBM PC; Intel's current importance comes from milking that franchise for the last two decades.

Its other ventures have been mixed. The company wrested control of processor chipsets, a feat hardly surprising given that market's close relationship to Intel's flagship product. But attempts in more distant areas such as memory chips, motherboards and 3D graphics accelerators haven't produced much.

Companies like Level One, Dialogic and DSP Communications take Intel even further from its strengths. Those acquisitions were solid in their fields before Intel bought them, and you can safely assume things won't get worse; but it's hard to see what Intel contributes, other than money.

Other issues:

  • Accrue Software
  • (Nasdaq: ACRU) Since Macromedia last week unveiled plans to buy Andromedia, vendors of traffic counting software have seen their stocks rise. E.phiphany shot up Tuesday after announcing a contract with Amazon.com. Accrue also gained ground then; now it seems to have garnered a bit of renewed interest today.

  • Sun Microsystems
  • (Nasdaq: SUNW) The workstation and server vendor leads this afternoon's earnings queue. First Call consensus sees 31 cents a share for the Sun's fiscal first quarter, but these guys are almost Microsoft-like in their ability to consistently deliver results slightly ahead of analyst forecasts.

  • Gateway
  • (NYSE: GTW) Obviously the success of the iMac says there's an audience for this stuff, but I just don't see the appeal of an all-in-one PC. You get fewer expansion options and lose more desk space. They're cheap, but there are cheaper tower machines out there. 22GO>