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, Barel Karsan (385 clicks)
Long only, deep value, contrarian
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Linktone (NASDAQ:LTON) is a Ben Graham net-net, with current assets of $125 million, total liabilities of just $11 million, and a market cap of $70 million. Most of the current assets are in the form of cash, which is the result of a share offering at a significantly higher price. The stock price has shown itself to be quite volatile, which is a good thing for value investors (and keeps other investors away).

The company's market cap has ranged from $45 million last year to over $100 million a few short months ago. While it is not losing money hand-over-fist as many other net-nets are, there are some risks of which investors should be aware.

Linktone not only operates in a very competitive arena, offering value-added applications to mobile phone users in China, but is also subject to severe market pressure from its customers, the three state-run Chinese telecom operators. These large players dominate the market and use their market power to extract high and escalating fees on Linktone and its competitors. Furthermore, these companies have been making progress in vertically integrating, offering popular applications to their user-base, thereby taking away Linktone's share of the market.

Linktone is extremely dependent on one of these operators in particular, with 70% of its revenue coming from China Mobile (NYSE:CHL). While there are contracts in place to secure Linktone's position temporarily, these contracts are short-term in nature and as discussed in the previous paragraph, all the power lies with the customer.
Finally, the company is controlled by a single shareholder, which makes it more difficult for shareholders to encourage activities that may result in price and value convergence (a very different situation than the one we saw with Acorn (NYSE:ATV) a couple of months ago).
The earnings situation for this company may be grim due to the weak market position in which Linktone sits. However, from a liquid asset and cash perspective this company is very attractive. The question investors will have to watch for going forward is whether the new management team is able to mitigate the risks (mentioned above) facing this company so that they may conserve the company's strong balance sheet position.

Disclosure: No positions

Source: Setting the Linktone