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Grim Gaming at GigaMedia

By Devon Rackle | More Articles
December 23, 2009 | Comments (4)

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Taiwanese-based gaming company GigaMedia (Nasdaq: GIGM  ) finally reported its fiscal second and third quarter results on Monday and they were anything but Giga. Earnings and revenues for both quarters missed analyst estimates horribly and also represented substantial year-over-year declines. Most notably, the company went from producing $23.2 million in net income for the combined period in 2008 to posting a $2.3 million loss in 2009. Ouch.

The results paint a dire picture of a company whose current operations are in decline with no clear catalyst for improvement. GigaMedia's gaming software business -- which operates poker site Everest Poker -- is falling prey to stiff competition, with revenues falling 26% year over year in the third quarter. In the meantime, GigaMedia's main growth driver, its Asian online games division, isn't really growing, posting only a 6% increase in revenues as newly launched games disappoint. In a clear sign that things aren't proceeding as planned, GigaMedia expects $35-$45 million in non-cash write-offs going forward related to underperforming online game assets.

Take all of the above ugliness together and it's easy to see why disaffected shareholders want out. As of this writing, the stock is making fresh 52-week lows after being decidedly bludgeoned. Nonetheless, I would submit that, at these prices, the selling might be overdone for valuation reasons alone.

Combine the $100 million up-front GigaMedia is set to receive as a result of its alliance with Mangas Gaming with the $73.9 million in net cash on GigaMedia's balance sheet, and one very closely approximates GigaMedia's $176 million market capitalization as of Tuesday's close. In other words, GigaMedia is essentially trading for its cash-on-hand with little to no value assigned to its operating business; those investing now are getting its 40% stake in Everest Poker, as well as its Asian online games business, for free.

Whatever the case, sticking with GigaMedia is clearly a gamble given its dim and uncertain outlook. Those looking for alternative Asian gaming opportunities might consider Perfect World (Nasdaq: PWRD  ) , NetEase.com (Nasdaq: NTES  ) , or Shanda Interactive (Nasdaq: SNDA  ) .

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Fool contributor Devon Rackle does not own shares in any of the companies listed in this article. Perfect World, NetEase.com, and Shanda are Motley Fool Rule Breakers recommendations. Motley Fool Options has recommended puts on Perfect World. The Fool has a disclosure policy.


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  • Report this Comment On December 23, 2009, at 12:12 PM, DrBob66 wrote:

    "...GigaMedia is essentially trading for its cash-on-hand with little to no value assigned to its operating business; those investing now are getting its 40% stake in Everest Poker, as well as its Asian online games business, for free."

    That's exactly why I bought some yesterday at $3.24. Yet...someone's still selling their shares (at even lower prices) today. So I've got my stop-loss order in place.

    The question is, what will they be doing with all their cash now? Will management just "live it up" for a while, having pocketed a nice profit?

    As you rightly point out, "sticking with GigaMedia is clearly a gamble given its dim and uncertain outlook."

    That's why I WON'T be sticking with them if the stock drops much further.

  • Report this Comment On December 23, 2009, at 1:17 PM, Viking70 wrote:

    It should not be surprising that the results were bad since GIGM was so late on their second and third quarter earnings releases. What is a little surprising is how bad the results were. I guess they wanted the Everest deal to complete before everyone knew how bad things were.

    I own GIGM despite my aversion to gaming stocks (customers/trends can be fickle sometimes). I think my aversion just got reinforced.

    However, I agree with you, Devon--the stock is beaten down so much that it is probably worth holding onto. Due to the small size of the company, a few good game releases will quickly lead to great earnings numbers. The next two or three quarters should provide some insight on their ability to release new and popluar games. They were obviously successful in the past, so they should be able to be again. Maybe, maybe not, but at least their cash position allows them to keep plugging away, which is good (and it shows good management either by design or chance).

  • Report this Comment On December 23, 2009, at 2:16 PM, Momentum21 wrote:

    They just convinced Mangas to cough up $100MM for a down payment on one of their platforms so while there are plenty of negatives being priced in to their price they still have some cred left which is more than you get with a majority of Biotech plays these days.

    Not a good reason to invest of course but I entered this week and will not throw in the towel just yet. Finding bottom is always the most daunting of periods... : )

  • Report this Comment On December 24, 2009, at 1:25 PM, Alwayzwrong wrote:

    I knew the numbers would be ugly, especially because I believe the estimates were alarmingly optimistic. I mainly invest in Asia, and 0%--zero--of the stocks in my portfolio were able to meet their 2Q estimates (although SDTH only missed by a penny). Oddly enough, only SDTH is trading below pre-earnings.

    Basically, GIGM's shareholders are betting on management at this point. Could you imagine anything worse happening in the next few months? Now that management has an awful lot of cash on hand, it'll be interesting to see what they do. A bad year isn't enough for me to write these guys off. Not yet, anyway.

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Related Tickers

5/25/2012 3:59 PM
GIGM $1.15 Up +0.03 +2.68%
GigaMedia CAPS Rating: ****
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