THQ (THQI) announced Thursday that it was offering a pack of games and soundtracks via Humble Bundle for any price gamers wish to offer (minimum $1). The pack consists of 3 Company of Heroes games, Darksiders, and Metro: 2033 for pc as well as 3 soundtracks. If the purchaser offered above the average (close to $5.50 throughout most of the day), THQ a free copy of Saints Row: The Third for pc is included.
This action appears to have boosted THQ stock by 38% Thursday, but investors must determine if this is an act of pre-bankruptcy desperation or deliberate marketing genius. I side with the latter, and offer a preliminary price target of $4 for THQ pending further information about the potential upcoming dilution which I am projecting at just over 50%.
At first glance this move looks awful. This is a classic firesale desperation ploy from a company with zero hope of survival. These games, although deeply discounted over Black Friday, retail separately on Steam for $130. With the average moving package price of $5.67 on Humble Bundle, THQ is accepting a discount of over 95%! THQ is sending the message that the potential resale value of Company of Heroes, Metro: 2033, and the pc ports of Darksiders and Saints Row: The Third is essentially nil. However, on second glance, this move might truly be marketing genius.
Building up Karma?
THQ's announcement has been trending near the top of Reddit all day long, and several gamers have been pledging their support to Company of Heroes 2 and Saints Row 4. Many gamers are buying packs just to show their support and a few are giving away their keys on the internet. Jason Rubin, President of THQ, recently added to the karma boost by purchasing a bundle pack for $1050 and donating it to a fan via Twitter. Rubin, the creator of Crash Bandicoot and Jak & Daxter, understands the gaming community and is embracing the sharing of codes and building of a fan base.
This move will not significantly boost THQ's near-term cash flow, but the most important sales numbers will involve the spring 2013 copies of Company of Heroes 2 and Metro: Last Light. The cheap price of the bundle will allow Metro: 2033, a highly rated, but mediocre selling PC game to gain additional exposure ahead of its sequel. The additional downloads of Saints Row 3 and Company of Heroes will also boost the already widely popular fan bases ahead of next year's releases. The significant support THQ is receiving on the internet should translate into additional enthusiasm for all three franchises next year.
Reaction among critics has been mixed, with a few sites questioning the ethics of Humble Bundle supporting a major publisher versus independent studios, while other sites such as PC Gamer are lauding the value of the package.
In approximately 10 hours, THQ has sold 266k bundles for a total of $1.51M. While THQ will likely see less than 50% of these receipts (users can donate a select percentage to charity and Humble Bundle and Steam takes an unknown cut), I approximate the marketing gains to be worth a minimum of $10M.
Cleaning Out the Closet
Although THQ's marketing trajectory is strong and they have secured private equity funding (conditions unannounced), the CEO, Brian Farrell, needs to go as soon as possible, and the deadbeat board needs to be completely reshuffled for a full turnaround to occur. The old CFO, Paul Pucino, resigned from THQ last week, likely as a condition of the new private equity investors, and I expect the CEO will follow him out the door soon. The newest member of the board, joined in 2005, and the entire cast of Farrell's yes-men are due for an ax.
Additionally, an unofficial group of shareholders at www.savethq.com have begun forming an equity committee which currently represents 2.65% of THQ's outstanding shares. They echo the demands for a board restructuring and Farrell's dismissal.
On November 8, I recommended a strong buy on THQ, based on my perception of market over-reaction. Although THQ announced a 'technical default' on their Wells Fargo Credit Facility the next day, these issues have temporarily been resolved. THQ has announced that significant dilution is coming, but I believe the market is already pricing in over 90% dilution. 90% dilution at these price levels would bring in $94M in cash, which is far more than I believe they need.
If you are not a risk-adverse investor, I believe THQ is a strong buy under $4 as I expect just over 50% dilution and strong turn-around potential.
I will submit a follow-up in the near-future with updated cash flow projections and potential acquisition interests. I will also be closely monitoring the private equity funding and will provide a valuation update immediately following public release.
Disclosure: I am long THQI.