The 3DO Co. (Nasdaq: THDO) finally might be clawing back to the top of the games market.
Yes, it's about games, but before you start casting about for weightier subject matter like network storage systems or 0.18 micron semiconductor developments, consider at least one analyst's projection for 3DO: improvements of 201 percent and 131 percent on the revenue and earnings line, respectively, for fiscal 2000; and almost 60 percent and 375 percent the year after. "This is the fastest growing company in the sector," says James Lin, analyst with Wedbush Morgan Securities.
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Normally you'd be well-advised to give short shrift to research from a brokerage firm that also functions as an underwriter for a stock -- Wedbush Morgan assisted on Friday's offering of 7.9 million 3DO shares -- but it's worth noting Lin had a "strong buy" rating on 3DO long before the company decided to raise more cash from the public market. And unlike some analysts who follow media or entertainment companies, Lin also seems to have a genuine fan's enthusiasm for the products of his coverage subjects, which include Electronic Arts and other PC game companies.
Not that 3DO hasn't tested the patience of Lin and other boosters. 3DO shares had been on one long slide from an all-time high just shy of 50 in late 1993, to the depths of a penny stock last October. The stock has slowly climbed since then, closing above 7 in the wake of the aforementioned stock sales. A touch of post-offering flipping cut into the price a bit this morning; fortunately, it's nothing significant, especially considering the Nasdaq Composite Index's overall slide today.
Any sort of improvement was long overdue. 3DO splashed onto the market in the 1990s with the world's first 32-bit video game console, never got the developer or retailer support it needed, and soon found itself laid waste by the Sony Playstation juggernaut. 3DO quit the hardware business entirely in 1997, and set about remaking itself as a software company.
It worked. After releasing just three titles last year, 3DO is on track to release 20 to 25 this year, and plans 40 to 45 games next year. In a research note released today, Lin predicted revenue of $144 million in this fiscal year, and $231.4 million next, with earnings per share of 16 and 76 cents, respectively. All coming after a large net loss in the second quarter, whose results were reported Friday.
3DO's success is built on the same formula used by toy company (and budding entertainment software titan) Mattel for a certain well-endowed blonde: build a popular name, then spin off product after product, such as Bubble Fairy Barbie, Pet Lovin' Barbie and Soccer Barbie, to name three currently featured on the official website. Personally, I can't see the appeal, but the product line's longevity is undeniable.
In the game software industry, you've seen the same trend of success with the Carmen San Diego, created by the former Broderbund (which was bought by The Learning Co., which in turn was acquired by none other than Mattel); Ultima, Wing Commander, Command & Conquer, EA Sports, all now owned by the PC gaming industry's King Kong, Electronic Arts; and others such as Acclaim Sports.
3DO boasts a dozen brands, but currently gets 75 percent of its revenue from titles based on three: Might & Magic (in case the name doesn't make it obvious, the games are set in a Dungeons & Dragons type land); Army Men (tanks, soldiers, guns, that sort of thing); and High Heat Baseball (Duh). "Brand-building may sound hokey, but if you look at this industry, very few have built brands internally," Lin says. "Publishers usually license brands."
If getting three quarters of your revenue from just three franchises seems a little tight in a cut-throat and oversaturated market like gaming, look at it this way: while other publishers strggle to outbid each other for franchise names, companies like 3DO can rely on a stable that includes names that already carry the kind of cachet that convinces gamers to buy offerings they'd normally avoid; thus, many players weaned on Might & Magic's traditional fantasy adventures will naturally gravitate toward Heroes of Might & Magic, which involves large-scale tactical battles -- wargaming, rather than roleplaying.
Using an established brand not only guarantees an audience, it also cuts down on development costs and time, because game designers and programmers can make use of existing materials for storylines, and often the source code itself. That's why 3DO should see large bottom line improvements over the next couple of years.
Relying on earlier materials can produce mixed results; Might & Magic VII, based on the same graphics engine used by its predecessor last year, now looks dated. But overall, 3DO's brand ownership provides improved quality, judging by the accolades lauded upon some of the company's maintstays.
That model also provides more reason for investors to latch on, judging by the gains generated Friday, when 3DO shares saw volume several multiples above the daily average. The interest was stimulated by the stock offering, but that doesn't mean there isn't a deeper reason to take a long term view. It's worth looking at.
The overall market was down in mid-afternoon trading, with the tech-heavy Nasdaq Composite Index down 46.57 to 2645.83, the S&P 500 lower by 2.52 to 1354.42, and the Dow Jones Industrial Average down 8.54 to 10902.42. 22GO>