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Analysts Weigh In On THQ Sell-Off, Homefront Sales, The Company's Future, And More (THQI)

Did investors overreact to low review scores of THQ's (NASDAQ: THQI) Homefront?

On Wednesday afternoon, THQ announced that its long-awaited first-person shooter had sold approximately 375,000 units on the first day of release. While this announcement was not an official “take that!” from company executives, it was a nice way of saying that maybe, just maybe, investors jumped the gun during the major sell-off this week.

That, of course, assumes that you believe that low review scores were the cause. Benzinga reached out to Michael Pachter, Managing Director at Wedbush Securities, to get his take on the matter.

“I think that THQ's share decline in excess of the overall market decline was caused solely by mediocre reviews for Homefront,” Pachter said. “The game is the most expensive one produced in THQ's history, had the greatest pre-launch marketing budget in company history, and was widely viewed as the centerpiece in the company's core games strategy.”

Pachter said that management had been vocal about its “high expectations” for the game, “and as recently as a week ago at the Wedbush conference, said that it would need to sell two million units to break even, clearly implying that they expected sales well above two million units.”

In the context of that, Pachter said that he would argue whether Homefront is selling well. “375,000 units on the first day is an admirable figure, but assuming that investor expectations on Monday were that the game would sell three million units or more, I'd say that it is a disappointing start, particularly given the mediocre reviews,” Pachter said. “If the reviewers reflect the sentiment of gamers, the game is unlikely to gain traction from word of mouth, and sales are not likely to be sustainable at this level.”

That's not a good sign. But Pachter does believe that the game will break even. “In my experience, the launch sell-through is consistent with overall sales of about 2 million, suggesting that the game will break even, but not providing the upside expected by investors last Monday,” he said. “Therefore, I don't think investors overreacted by much. Keep in mind that THQ spends only around $250 million annually on R&D, so asking whether ‘one game' is enough to warrant this reaction is misleading; instead, you should focus on the fact that 20% of the company's R&D budget was spent on something unlikely to yield a profit. Thus, I think the market move was warranted.”

Bradley Safalow, the founder and CEO of PAA Research, has another take on THQ's decline. For starters, he was personally surprised by the massive sell-off.

“I underestimated investors' expectations for the game,” Safalow told Benzinga this morning.

Ultimately, Safalow believes that investors were more concerned about THQ's overall ability to deliver a successful product to the core gamer market than they were about the success of one individual title.

Safalow believes that Homefront could go on to sell 750,000 units worldwide this week, but might have a difficult time reaching the initial lifetime estimate of more than 3.5 million. “I think it would have fared better with the press if it had a longer single-player campaign,” he said, noting that many critics are giving Homefront a low score due to the short length of its single-player content. Safalow believes that if the campaign had been two or three hours longer, the game would be in a much better position.

“Then it could have achieved a Metacritic [average] of 80,” Safalow added.

Further, Safalow believes that while Homefront's lifetime sales are not likely to meet expectations, the game could still provide THQ with a “modest” profit.

However, Safalow noted that the demand for this genre (military-style first-person shooters) is “extraordinarily high.” Medal of Honor – which achieved a Metacritic average of just 74 out of 100 (Xbox 360 version) – managed to sell five million copies. But it was a sequel; Homefront is not. And, as Safalow pointed out, Electronic Arts (NASDAQ: ERTS) is very good at marketing its games. Whereas Medal of Honor had a successful beta before launch (allowing select consumers to play the game early), Homefront was not available to play until the day it was released.

But not all is lost in the land of THQ. Safalow has high expectations for Saint's Row: The Third, which he expects will achieve lifetime sales of five million units (three million through CY2011).

Meanwhile, Wall Street Strategies reiterated its Buy rating on THQ today, but lowered its price target to $6.00 from $7.00. “We think Homefront will end up meeting sales and profit plans held by management, aided by DLC,” Brian S. Sozzi, a research analyst at Wall Street Strategies, said in today's report. “We continue to be optimistic on the remainder of THQ's release slate in FY12, headlined by Red Faction and Saints Row: The Third.”

At press time, Janco Partners' Mike Hickey (the analyst cited in the Reuters story) had not responded to a request for a comment.

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