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Needham’s Charlie Wolf began coverage of video game software maker THQ (THQI) with a Buy rating and $37 price target. Wolf wrote in a research note that his call is based on three factors.

One, he says the company has made a “good decision” in focusing on developing games for the Nintendo Wii. He notes that the company has important franchises in games for kids; it has partnerships with both Disney’s (NYSE:DIS) Pixar and Viacom’s (NASDAQ:VIA) Nickelodeon. (The result is games based on Cars, Finding Nemo and SpongeBob.)

Two, he says the company is gaining traction in the market for complex, mature-themed games, “the games which serve the free-spending hard-core gamers who account for the majority of industry revenues.” The company’s games in that category include Saint’s Row and Company of Heroes.

And three, Wolf asserts that large publishers like THQ should benefit from rising barriers to entry in the console gaming business:

As console hardware has become increasingly powerful and complex, the costs to develop and market a state-of-the-art game have ballooned, and therefore so have costs of maintaining a portfolio of games… companies must be able to spread their risk into games on many franchises and genres, which is difficult to accomplish when budget requirements for development increase. We think that smaller publishers will cede some market share as rising development costs make it too expensive and risky to maintain a portfolio of games.

THQ yesterday was up 30 cents at $32.04.

THQI 1-yr chart

thqi chart

Source: THQ: Gaining Traction in Games