A Hedge Fund Staple Just Got Really Ripe

There is nowhere for online gaming to go but up, believe that. However many million "gamers" have their headsets on and joysticks firing right now pales in comparison to how many will in 2 years, or 5. What percentage of Africans have regular computer access? How many will in 3 years? Same for the rest of the less developed world. Chinese online-gaming stocks look to be in great shape, the safest probably being market-share-grabbing search engine Netease (NTES), who gained domestic sales and distribution rights to World of Warcraft, the world's most popular online game.

The best value in this industry, a value that got about 10% better Friday morning, is Gigamedia (GIGM). They own and market several games, some of which are soon to be released in China. The company is based in Singapore and has recorded huge profit margins on increasing revenue, with $190M in sales for FY2008 and $44M in net income.

Friday morning GIGM announced that its chairman and director resigned for family reasons. To grow a company as efficient as Gigamedia he must have been a brilliant and motivated man, and I genuinely wish him the best as I do all mankind. But with a P/E around 8, GIGM has re-entered "filthy cheap" territory. With shares already trading 80% below last years highs, the resignation knocked them down from $6.5 to very near $6. Several hedge funds are huge holders of this company, which is not far up from 52-week lows.

Ultimately I believe this company would be worth atleast twice as much were it based in China. Given that I already own a few chunks of Chinese companies, being based in growing Singapore is a bonus to me. Q1 FY2009 will be very telling, but all I can see is upside from current valuation.

Disclosure: Long GIGM.

Comments

[sticktoitiv...:]

"Friday morning GIGM announced that its chairman and director resigned for family reasons."

You don't become chairman by caring about your family. You do it by being away all the time. That should set off your bullshitometer. He was either forced out, or he didn't want to go down with the ship.

May 03 03:09 AM

[pmcmullen100:]

What a terrible article. Here are a few obvious errors that would have been avoided if the author had done any research on the company:

1. GIGM is not based in Singapore.
2. The stock dropped Friday because one of the main analysts following it significantly decreased earnings estimates.
3. The company is not a pure-play Asian games company. Most of its revenues come from Everest gaming (online poker and online casinos), which are based in Europe, not Asia.
4. Revenue was basically flat last quarter, and is expected to be flat for at least another quarter.

I"m long GIGM and would like people to buy. But not based on terrible information like this article contains.

May 03 09:56 AM

[Danny Furman:]

Maybe "family reasons" are not really such, however I see no reason to discount that release. I knew about Everest Gaming and if that is the primary source of Gigamedia's revenue I admit to being under-informed. Online poker is hugely cyclical, though (look at CRYP or any others you know of). During and around the World Series of Poker, sites experience twice (or more) their regular traffic and Everest Poker. Based in Taiwan, yes. Sogotrade says Singapore.

May 03 10:46 AM

[Danny Furman:]

... I don't think a "buy" to "hold" downgrade generally results in a 13% hit... It's called a panic/sell-off by those sure "he was forced out or didn't want to sink with the ship." That may be true, but the current price accounts for declining performance. From a valuation perspective I see very little downside. Additionally, will GIGM not grab any share of the $2.8B Chinese gaming industry when Luna (and eventually other games) is released there?

May 03 11:37 AM

[Danny Furman:]

After looking at Everest Poker more closely I like GIGM more now than ever before. On pokertube.com, a fairly self-explanatory site, Everest is ranked third behind Full Tilt and Pokerstars. Everest has a $5 minimum deposit, whereas most sites require $25 or $50. They are, percentage-wise, the fastest growing site. Poker is new and booming in China and Russia, and a name like Everest should carry some weight. There is also one big reason I believe Everest could grow tremendously in Europe as it continues to in Asia: American players are, on average, LEAGUES beyond the rest of the world. It's a sheer matter of experience. Like all sites besides Full Tilt, Bodog & Pokerstars (sorry if I missed 1) Everest does not accept American players. Players want to win, and softer competition tends to be more beatable than the best. Everest sponsors several European and Russian professionals, and when tv watchers see dinner-plate sized Everest logos on the shirt of a guy who just won bricks of cash, they will give it a $5 (possibly $6) shot.

May 03 12:46 PM

[sticktoitiv...:]

"Maybe "family reasons" are not really such, however I see no reason to discount that release."

Okay I'll give you a couple. The director may have been an honest man and resigned rather than doing something illegal such as cooking the books. He may be a dishonest man who was asked to leave because he permanently damaged the company. Some companies that loose an executive turn out just fine. Some executives end up in Leavenworth. That adds risk. The discount is therefor warranted.

May 03 01:46 PM

[Danny Furman:]

Of course I accept that risk, but how big is it? Maybe huge, but that would seem to require previous years numbers being fudged. This is not a capital intensive industry, and the popularity of GIGM's games is hardly in question.
I see this as a very good opportunity relative to others in an industry. I like other industries a lot better.



On May 03 01:46 PM sticktoitiveness wrote:

> "Maybe "family reasons" are not really such, however I see no reason
> to discount that release."
>
> Okay I'll give you a couple. The director may have been an honest
> man and resigned rather than doing something illegal such as cooking
> the books. He may be a dishonest man who was asked to leave because
> he permanently damaged the company. Some companies that loose an
> executive turn out just fine. Some executives end up in Leavenworth.
> That adds risk. The discount is therefor warranted.

May 03 02:14 PM

[Danny Furman:]

Sorry stickto, I misread your last line. Fair enough.

May 03 02:42 PM

[sticktoitiv...:]

Stickto, I prefer stick. "Of course I accept that risk, but how big is it? Maybe huge". That is your right as owner, but as you have pointed out this is a favorite of hedge funds. They are selling the news. I know you want to defend your terf, but maybe conventional wisdom is conventional for a reason.

May 03 03:28 PM

[Danny Furman:]

I am confident hedge funds were not selling. Volume was too low.

May 03 03:39 PM

[Benito:]

Ben

Regards to GIGM, isn't Barney Frank expected to pass some bill to overturn the unlawful online gambling act--this week?

May 06 03:39 PM