According to recent trading, video game companies THQ Inc (THQI). and Take Two (TTWO) Interactive Software, Inc. have a nearly identical market capitalization value.  THQ stock has nearly tripled in the last three months on word of solid sales of their new games, UFC Undisputed and Red Faction Guerilla.  But do these companies really deserve similar values in market trading?

Take Two received a $26 cash offer in February 2008 by competitor Electronic Arts (ERTS).  THQ has never received a public buyout offer, even when its stock fell below its cash-on-hand value in March 2009.  One wonders why a company would have any interest at all in buying out THQ?  Unlike Take Two who directly owns Grand Theft Auto, Bioshock, Max Payne and Civilization among other names, THQ owns very little significant intellectual property and relies on outside temporary licenses for their top line revenue.  At the same time, new competitors Warner Brothers and Disney video game divisions have risen on their own without the help of older experienced publishers like THQ.  In the ruthlessly hit driven business, many publishers like Midway Games and Atari have fallen into serious financial trouble despite their years in existence.

THQ management has led a company with two consecutive years of negative earnings, including a massive $6.45 loss in the fiscal year ending in March 2009.  THQ thus cut one third of its employees after its dismal year and 813 million in revenues.  Analysts project the current year will end with 825 million in revenue.  On the other side, Take Two completed a year with strong earnings and analysts project revenue of 1.13 billion this year and 1.3 billion next year, when Take Two releases the next major installment of Grand Theft Auto.

So with around 50% more revenue, how does Take Two manage to be so cheap?  Or rather, how does THQ stock end up being so expensive?  Is it because video game investors are crazy?  Well, in a way, yes.  Investors in video game stocks seem to wait and see whether an anticipated game performs well and then they altogether run up the price of the stock, as if they just received FDA approval for the latest addictive piece of interactive entertainment.  In the process, fundamentals of previous performance of titles are thrown out the window.

In reality, a company like Electronic Arts would likely agree to buy Take Two at double their current market cap in a heartbeat, while the same cannot be said for THQ.

Disclosure: short THQI, long TTWO