The Novelty May Be Wearing Off for Iwerks : Multimedia: Virtual-reality innovator was a hot commodity on Wall Street in the fall. But last quarter, its stock was the worst performer in the region.

Iwerks Entertainment Inc. has always aimed to thrill, but lately the firm’s investors could do with a little less excitement.

“I’ve lost my sense of humor--almost,” said Keith Benjamin, an analyst at San Francisco-based Robertson Stephens & Co., which underwrote Iwerks’ $44-million public stock offering last October.

The offering was one of last year’s hottest. Iwerks stock went public at $18 per share, then rocketed to $37 in a few weeks. But since then, the price has plunged 84%, and the stock closed Monday at $5.75 per share.

Founded by two former Walt Disney Co. executives--Iwerks CEO Stan Kinsey, 40, and co-chairman Don Iwerks--Iwerks makes a variety of virtual-reality rides and theaters. At first, Wall Street found the combination of a Disney pedigree and virtual reality irresistible.

But that same novelty may also explain Iwerks’ dizzying descent. The company has run into problems finding investors for its new Cinetropolis complexes. These are so-called “theme-parks-in-a-box,” which offer Iwerks attractions such as theaters with moving seats and dance floors surrounded by 360-degree movie screens.

Iwerks had high hopes for the concept, but so far, only two deals to build them have been finalized.

It didn’t help when Iwerks said it expects to post a loss for its June quarter. In its third quarter ended March 31, Iwerks lost $891,918, compared to a profit of $2.31 million in the same period a year earlier, while revenue in the quarter fell 11% to $10 million from $11.2 million a year earlier.

When Iwerks went public, it offered one of the few opportunities for investors to get in on the supposed trend toward virtual-reality attractions, said John Taylor, analyst for L. H. Alton & Co. of San Francisco, an investment banking firm.

Now, Taylor said, investors are more skeptical: Some form of virtual reality may indeed be what consumers are looking for, but “what the right recipe is, I don’t think anyone knows yet,” he said.

Iwerks said new casinos springing up in the Mississippi River region were expected to be major buyers of Cinetropolises. But several would-be customers had trouble getting permits or encountered other regulatory snags, said Deborah Miao, Iwerks’ chief financial officer.

At the same time, unexpected costs cropped up in the development of other projects, including a new giant-screen theater at Zion National Park in Utah. There were also delays in the installation of a new Virtual Adventures game at the National Maritime Museum in Norfolk, Va.

Iwerks’ management acknowledges mistakes. Finding locations for Cinetropolises has been tougher than expected; so has finding people willing to put up the estimated $18 million per complex it takes to build one, Iwerks’ Miao said. And the first Cinetropolis, which opened in the Foxwoods casino in Ledyard, Conn., has not brought hoped-for revenues.

The Cinetropolis there is popular, Miao said. But in its haste to demonstrate the Cinetropolis concept, Iwerks accepted a deal that allowed the casino operator to use the theater space for its own live shows during peak hours, thus saving on fees it would otherwise pay to Iwerks for films and software.

Analysts, who were touting the stock a few months ago, now say that Iwerks has suffered the same fate as other start-up high-tech and biotechnology firms. All are trendy stocks that haven’t fared well recently. “No one is willing to give them (Iwerks) the benefit of the doubt today,” said Benjamin, the Robertson Stephens’ analyst.

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Despite recent stumbles, Iwerks’ core business--developing rides and software for theme parks, such as those run by Paramount Parks and Six Flags--can still make the company attractive to investors, Benjamin argued.

About half Iwerks’ sales last year were overseas, especially Asia. Its second Cinetropolis theater complex is scheduled to open in Chiryu, Japan, in November.

Meanwhile, the company’s efforts to sell giant-screen movie theaters has been successful, Benjamin said. It has emerged as a strong competitor to Imax Systems Corp., its chief rival in that market.

Iwerks also has the advantage of being a well-established leader in virtual-reality entertainment, Benjamin said.

Some, though, are skeptical that out-of-home, multimedia attractions such as those made by Iwerks will ever live up to early expectations on Wall Street.

The virtual-reality craze was “a one-time shot . . . Maybe the novelty has worn off,” Robert Mescal of the Institute of Econometric Research said.

Those who think so are investors, not consumers, retorts Iwerks chief executive Kinsey, who co-founded the company in 1986. Iwerks’ new flight-simulation ride at the Six Flags Great Adventure amusement park in New Jersey has drawn big crowds, comparable to those at the park’s best roller coaster, according to George Ladyman, a Six Flags vice president.

In the long term, the expansion of Cinetropolis still makes sense, Kinsey contended.

The idea will soon gain momentum, and the company still has $30 million in cash to develop it and other attractions, he said, adding: “I never got that excited about the stock price going up in the first place. I know winning on Wall Street is never that easy.”