With its “Rugrats” and World Wrestling Federation (WWF) wrestling games flying off the shelves last holiday season, it appeared that the sky was the limit for Calabasas video game maker THQ Inc. In the course of a few months, though, THQ’s shares have tanked. Chief Executive Brian Ferrell warned analysts that earnings would slow in the first and second quarters, and the stock began to decline. Making a bad situation worse, several law firms piled on by threatening to file class-action lawsuits against the company for allegedly tipping off analysts to the earnings slowdown before putting word out to the public. (The company has issued a statement saying the allegations are without merit.) In December THQ was trading at a split-adjusted high of $39.25 a share. As of the end of March, it was going for around $18, prompting investors to wonder whether THQ is headed for a TKO (technical knockout, in boxing lingo). Yet with THQ sitting on a broad product lineup this year and the company gearing up for the release of Sony’s hot new PlayStation 2 console in fall 2000, some analysts believe the company is poised for a comeback. “I see this as a great buying opportunity,” said Anthony Gikas, an analyst with U.S. Bancorp Piper Jaffray. “There has been a tremendous amount of shares trading hands and the stock appears to have built somewhat of a base. I don’t think there’s too much more downside.” Stewart Halpern, an analyst with Banc of America Securities LLC, agreed. THQ has a strong lineup of games for 2000, with several new titles as well as sequels to some of its most popular games, including the wrestling and “Rugrats” titles. Despite the decline in share price, Ferrell sees a bright future for THQ and the industry as a whole. A lot of people in their 30s and 40s grew up playing video games, and now the industry out-grosses the Hollywood box office. As Sony prepares for the U.S. launch of its PlayStation 2 console and Microsoft develops its X-Box game console, the interactive entertainment software industry is about to venture into a new frontier, Ferrell said. “PlayStation 2 dramatically increases the quality of graphics and sound. When you’re driving down the road in a road racing game, rather than just see a tree, you see leaves blowing on the tree,” he said. “You’ll be able to see facial expressions, pain, joy, the thrill of victory, the agony of defeat. We can do all those things now.” THQ is developing a role-playing fantasy game called “Summoner” that it hopes to have out in time for PlayStation 2’s U.S. launch in the fall. Ferrell hinted that the company has other games in development for the new platform. “Sony’s talking about (selling) 10 million units the first year and 100 million units in the first five years,” said Ferrell. “You’ll have a unit next to the television and it will be able to play DVD movies, audio CDs, games and connect to the Internet on a broadband level.” In January, Ferrell boasted in a press release that THQ had its biggest holiday selling season ever. THQ’s customers include Wal-Mart, Toys R Us, Target and Best Buy, as well as other national and regional retailers. The company’s games are developed both internally and under contract with independent creators and are typically based on properties licensed from third parties. THQ reported net income of $14.9 million (72 cents a diluted share) for the fourth quarter ended Dec. 31, compared with $10.9 million (57 cents) for the like year-earlier quarter. Revenue was $131.7 million vs. $111.5 million. According to consensus estimates from I/B/E/S International Inc., the company’s net income will drop to 25 cents a share in the first quarter and 3 cents a share in the second, before rising to 36 cents in the third quarter and powering to $1.44 in the fourth. But analysts have come under criticism in the financial press for forecasting such a big fourth quarter so far in advance. Gikas said he’s comfortable with the estimates, but conceded that it is difficult to make accurate projections in the entertainment software sector more than one or two quarters ahead. As for the threatened class-action lawsuits over the company’s earnings disclosure, no such suits had been filed against THQ as of the end of March, but the threat of legal action has likely scared away some investors. “It’s total B.S.,” said one analyst, who doubts any legal action would hold water. Company officials said they’re not prepared to comment unless a suit is actually filed, but they did say the company would vigorously defend itself if THQ is sued.