Gaga for GigaMedia

It seems these days that investing the market is as big as a gamble as placing a bet at GigaMedia's (Nasdaq: GIGM) online casino. After generating 16% revenue growth and a 22% jump in non-GAAP earnings to $0.18 per share, investors sent the shares down another 15%.

Of course, a plummeting stock price isn't anything new to Giga shareholders. The stock has lost nearly 80% of its value since the beginning of the year. Turmoil in the Chinese market has slashed valuations, but GigaMedia has been hit the hardest among its fellow gaming rivals.

	1-Year Return	P/E
Shanda Interactive (Nasdaq: SNDA)	(25.6%)	10.9
NetEase (Nasdaq: NTES)	(2.4%)	11.4
The9	(33.8%)	7.9
Giant Interactive (NYSE: GA)	(56.4%)	9.6
Perfect World (Nasdaq: PWRD)	(31.5%)	10.1
GigaMedia	(77.2%)	5.8

Fundamentally speaking, however, the company has done anything but deteriorate over the past year. With no net debt and over $100 million in cash sitting on the balance sheet, the financials remain clean. During the quarter, the company disposed of its low-margins ISP business and further demonstrated the strength of its Everest poker brand; for the second year in row, it was awarded the Poker Operation of the year by eGaming Review.

More importantly, cross-selling effects in the gaming software business began emerging, as roughly half of the new active real-money casino players were existing poker players. This led to 51% casino revenue growth (a highlight of the press release) and displays the extent to which management can continue to leverage the brand. This segment looks to have promising potential; six additional games are in the pipeline set to launch by the end of the first quarter next year, and a partnership with Marvel Entertainment (NYSE: MVL) was completed earlier this month to create superhero cash-wager games.

Aside from the gaming software segment, however, results were uninspiring, even considering that the third quarter is seasonally slow. Most concerning was the fact that two of the four online gaming titles expected to launch between now and the first half of 2009 have been delayed, and management’s rationale was sketchy at best. This is certainly something to keep an eye on.

Still, GigaMedia remains a great long-term investment. While it’s not generating the growth that some of its fellow Chinese gamers have been posting, its stock is accordingly not priced for hefty growth. In fact, in my mind, the company is pretty undervalued. Giga holds some great potential, given some of the title line-ups in the release queue, including the immensely popular NBA Street Online from Electronic Arts (Nasdaq: ERTS). Selling at less than six times this year’s expected earnings, Giga looks like a strategic investing play.

Related Foolishness:

• Is Giga poised to pop?
• Last quarter, this Fool thought Giga held a winning hand.
• Does Asia still possess a sinful profit opportunity?