Cryptologic's Upside Not Reflected in Price

| About: CryptoLogic Limited (CRYP)
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Cryptologic (NASDAQ:CRYP) is one of the best risk/rewards I know of. I mentioned them in my cash-rich companies article several weeks ago. CRYP makes and operates software for internet gambling sites. The stock took a hit when the U.S. banned online gambling.

CRYP would have received 30% of its revenue from the U.S. this year. That revenue is completely gone. Consensus EPS estimates for 2006 are $1.85 and the stock is selling for $18.60 now.

So that's a 10x multiple and the company is losing 30% of its revenue, you say. But CRYP has $9.35 per share in cash and no debt. And analyst estimates are all over the board, many of which are absurdly low. One analyst has a 2007 estimate of $0.17. CRYP has already said that they would earn $0.10-0.15 in the 4th quarter of this year alone, and that is with all of the U.S. revenue gone. That also includes some significant one time charges for CRYP's corporate move to Ireland and severance associated with the U.S. biz losses.

Furthermore, the company operates on long-term contracts (measured in years), and recently signed up two big customers. One of these will begin contributing revenue late in the 4th quarter, the other early in the 1st quarter of 2007. Revenue from their other customers has been growing.

It's possible that CRYP actually posts higher revenue and profit in 2007 despite the U.S. issue. Even if they don't, it would be shocking if they didn't earn at least $1 a share next year. I think the lowball case is a stock price of $26. Should 2007 numbers surprise on the upside, a $40 stock is not unreasonable.

CRYP is a prime example of the market overly discounting a stock simply because of uncertainty.

Disclosure: I own shares of CRYP.

CRYP 1-yr chart: