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Getting rich off Tetris
Cell phone games are hot and so are shares of JAMDAT Mobile, a leader in the field.
June 7, 2005: 6:02 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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Out of a JAM? Shares of JAMDAT Mobile stumbled shortly after their IPO last year but have bounced back sharply in 2005.
Out of a JAM? Shares of JAMDAT Mobile stumbled shortly after their IPO last year but have bounced back sharply in 2005.
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NEW YORK (CNN/Money) Cell phones are not just for having annoyingly loud conversations in restaurants anymore. More and more people are using them to satisfy their jones for Tetris, Blackjack and Scrabble.

Selling games for cell phones is a big business, potentially even more lucrative than trendy downloadable ring tones. And no company is reaping the benefits more than JAMDAT Mobile (Research).

JAMDAT went public last year and shares have surged more than 75 percent in the past month. Of course, any time you see such a spike, you have reason to be wary.

But analysts think the run-up is justified and that this could be just the beginning. Here's why.

Tetris going mobile

The main factor behind JAMDAT's latest surge was a blow-out first quarter earnings report in which it also issued strong guidance for all of 2005 and 2006.

In the past two months, earnings estimates have increased by 45 percent for 2005 and by 54 percent for 2006. According to consensus forecasts, analysts now expect earnings to more than triple this year and increase another 36 percent in 2006. Sales are predicted to increase more than 120 percent in 2005 and 54 percent next year.

And several analysts said they thought the new estimates may be too low.

JAMDAT recently acquired a company called Blue Lava, which owns the right to wireless versions of the Tetris puzzle game. The company also recently acquired the licenses for several other popular video games, such as the first-person shooter classic DOOM and SOCOM: US Navy SEALs, a game made by Sony. (Research)

Analysts say these deals could help boost JAMDAT's presence internationally, key since the market abroad is expected to be bigger than the U.S gaming market. Only 14 percent of JAMDAT's first quarter revenues were from international markets.

"Tetris will help JAMDAT expand its market share internationally, especially in Asia and Latin America," said James Lee, an analyst with DE Investment Research. "And exclusive rights for DOOM and SOCOM could help them in Europe since that market is more action oriented."

In addition, JAMDAT also has the exclusive rights from Major League Baseball to publish MLB-branded wireless baseball games. That's all on top of the other popular games it already offers, such as JAMDAT Bowling, Lemonade Tycoon and a series of casino games, such as Blackjack and Downtown Texas Hold' Em.

Pump up the Jam

Having such a large portfolio of games makes JAMDAT an attractive partner for wireless carriers, which typically get about a 30 percent cut of the revenues from game downloads, according to Mark Argento, an analyst with ThinkEquity Partners. Games typically cost around $2 to $3 a month or about $5 to $8 for unlimited use.

Argento added that the beauty of JAMDAT's business is that it has relatively low costs so profit margins are rich: JAMDAT reported a gross margin of 77 percent in the first quarter and a net margin of 18 percent.

"If you have a game that sells a couple hundred thousand downloads it can be incredibly profitable," Argento said. "The digital distribution model is attractive so there are no worries about inventory."

What about competition? Clearly, larger gaming companies like Electronic Arts (Research), Activision (Research) and Take-Two Interactive (Research) might be interested in getting into the business. But it might not be that easy for them.

Developing games for cell phones is complex , said Jason Brueschke, an analyst with Pacific Growth Equities. That's because companies have to come up with different versions that can port (or be downloaded) by scores of cell phone models. Plus, each game has to be tailored for the technical specifications of different carriers.

So JAMDAT's competition is more likely to come from other specialist wireless gaming firms, including Gameloft of France, as well as private companies such as Digital Chocolate, MFORMA and London-based I-play.

Brueschke thinks the market could be big enough for several players, just as the gaming market for traditional console games has several leading companies.

"We are early in this market and there could be six or seven winners. It's not a winner take all business," said Brueschke.

Still, a 75 percent gain in a month? Shouldn't investors be a bit worried?

Don't listen to takeover talk

One cause for concern is that it appears some of the recent surge can be written off to takeover speculation. It's the summer, which means it is time for bored traders to spread unsubstantiated rumors. The one that has made the rounds as of late is that Electronic Arts might be interested in buying JAMDAT.

But Brueschke thinks that if EA were to do a deal, it probably wouldn't be for JAMDAT. Gameloft, which is starting to make inroads into the United States, is a more likely target, he said. That's because there already is an EA connection. Ubisoft, a French gaming company that EA owns 20 percent of, in turn has a minority stake in Gameloft.

Brueschke said another developer that could make sense for EA is Digital Chocolate since its founder and CEO is Trip Hawkins...who also started EA.

But even if a little takeover froth is built into the shares of JAMDAT, it isn't absurdly expensive. The stock is trading at 27 times 2006 projections, not too rich for a company that is expected to post earnings increases of 30 percent a year for the next few years.

What's more, that multiple is in line with the valuation of EA, which trades at about 27 times estimates for its next fiscal year (ending in March 2007), even though its long-term growth rate is expected to be just 18 percent.

"There is some upside here. The company is being conservative with their guidance and the penetration of wireless game downloads is still really low," said Kevin Dede, an analyst with Merriman Curhan Ford. "If you hold this stock for a year you could be pleasantly rewarded."

For more about personal technology, click here.

Ga-ga for gaming? Read Game Over columns by Chris Morris.

Analysts quoted in this story do not own shares of JAMDAT Mobile and their firms have no investment banking ties to the company.

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Tech Biz
Video Games
Wireless Phones
Written by: Paul R. La Monica
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