Temptation to buy a stock like Midway Games (MWY:NYSE) can sometimes be unbearable.

Pure plays are always attractive. Small-cap pure plays are doubly so, especially for us.

Consider that Jim Cramer has been educating his legion of viewers on the sales and development cycles for video game stocks for years now. Individual investors are getting very savvy about these issues.

Also consider that we’re in another big upgrade cycle for gaming consoles. Even if a large portion of our Penny Sleuth audience doesn’t actually play these games, a lot of you have probably bought these new, expensive units for your children or grandchildren. The most glaring sign of the times in this industry has got to be Sony’s audacity to price Playstation 3 at $600 for the all-singing, all-dancing iteration. How are sales for that one? Well, company execs claim that it’s a testament to their ability to supply their channels so that if you go to a retail outlet, you will find a PS3. Translation: Stores have plenty because they are too expensive to move.

But maybe Sony will eventually be proven right and the market can support a super high-end game console. After all, the demographics are certainly on their side…

The Entertainment Software Association (ESA) says that 75% of heads of households play video games, and the average player is clearly in the adult age range at 30 years.

The largest percentage of game players comes from the 18-49 age group, at 43%. Research also has found that 19% of video game players are 50 or over!

No wonder video game stocks have garnered high levels of attention. Back in November of last year, we highlighted Midway, a once-prominent name in the business that has proven to be a stock to avoid — without question!

As we wrote back in November, Midway Games had a stranglehold on the industry throughout the 1980s — when arcade games were big business. In the years following the move from arcades to the hyper-growth of home consoles, Midway took many of their top coin-operated titles and transferred modern versions to Playstation and Microsoft’s Xbox.

Midway’s been in the red since 2000 up through to today. This is the greatest period in video game interest and sales and profitability still alludes them. If you read their filings, a huge revenue drop occurred from 1999 to 2000 when the company left the coin-operated arcade business. That was the last time they posted a profit.

If you followed our lead to avoid MWY shares, it was a good move.

Since November 9, 2006 to now, the stock has dropped a whopping 27%! The chart is pretty ugly…

Source: BigCharts.com

But is there a ray of hope for Midway? Well, 4Q06 revenue was $97 million — 39% higher than sales in the same quarter in 2005. The loss for the quarter was $0.02 — a marked improvement over the $0.42 loss the year before.

Midway is securing some strong licenses for games, with one of their strong sellers being Happy Feet, based on the film.

The market doesn’t seem to think MWY is about to turn the corner to profitability. This is going to be one to watch in the weeks ahead.

Until next time,
Craig
March 8, 2007

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