Gigamedia Reports Reasonable Earnings

Gigamedia Ltd (GIGM), purveyor of online gambling and games, has reported reasonable earnings growth for the historically slow 2nd quarter. The quarter’s results came in a little below the record 1st quarter but were up nicely from Q2 of 2007. First a quick recap of the year over (YoY) year results:

• Revenues up 31%.
• Net income up 11% to 19¢ per share, handily beating the consensus estimate of 17¢.
• Flagship Everest Poker up 26%.
• Everest Casino software up 34% and 10% QoQ.
• Asian games up 67%.

The Europe oriented Everest Poker was slower in Q2 vs. Q1 due too the traditional summer season slowdown combined with competition from the very popular Euro Cup soccer tournament. The 3rd quarter is also part of the summer season and management is not expecting revenues and profits to really take off again until the 4th quarter of 2008.

There are a couple of very positive developments in the short term window. Gigamedia has found a technical partner to help them set up sports betting in Europe. This new line of business should kick off in the 4th quarter, this year. The company also launched their Asian real money games at the end of the just completed 2nd quarter. This first wave is aimed at Japanese gamblers and has been extremely well received. I was impressed to hear that some of the most active players are playing Pachinko up to 6 hours per day. Next up is pending approval to launch EA’s NBA Street game in mainland China. Basketball is very popular in China and Gigamedia management expects NBA Street to become the top online game there.

GIGM share price has come under severe pressure over the last 10 months and is now trading at around 18 times trailing 12 months earnings. This is a no debt, high cash flow business that will get back to 40-50% annualized revenue and earnings growth soon. Over the next 3 to 5 years I expect GIGM to become a multi-billion dollar market cap company from its present $700 million.

Disclosure: Author has a long position in GIGM.

Comments

[footchester:]

Along with HOGS, AOB, CFSG and others, GIGM represents what I believe to be a test of patience. Fans of "Mad Money" and similar shows see no big move after earnings and dump their shares in search of the next big thing. The patient investor sees a stable of companies with no debt, near vertical growth and steadily improving margins. These are not the 'hot' Chinese stocks that climbed up to triple digit PE ratios last year only to be knocked down hard. These are small cap companies with balance sheets that Fortune 500 companies only dream of. As share prices remain stagnant and growth continues to accelerate, we are beginning to see "real" companies with P/E/G ratios falling below 0.20.

I have never felt more confident about a portfolio of "non-performing" stocks.

2008 Aug 12 11:10 PM

[j_remington:]

$10 is a good starting entry price for GIGM.

2008 Sep 09 02:45 PM