KongZhong (NASDAQ:KONG), a wireless value-added services (WVAS) company out of China, is still rated four out of five stars in the Motley Fool CAPS investment community. Today's player comments on the stock sound hopeful, if not a little desperate:

  • "The market is [overreacting]"
  • "oversold again"
  • "well ... almost no room to go down"

KongZhong provides mobile games, a variety of news, message boards, ringtones, and the like, all of which are used by customers on their mobile phones. To push these services to the phones, KongZhong works with China's major cell carriers, including China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU).

While these relationships, particularly the one with China Mobile, give KongZhong access to a very large customer base, they also pose some serious threats to the company. In addition to the negotiating advantage the carriers have when it comes to policies and rates, the WVAS providers have always faced the possibility of the carriers starting to provide their own WVAS services.

For the first quarter, KongZhong's revenue was at the low end of the company's projected $20 million to $21 million. Gross margin was up sequentially to 53% from 51% in the fourth quarter. Operating expenses, though, grew 13% sequentially on the backdrop of a 15% decline in revenue, so operating margins were woefully low.

Perhaps more worrisome for investors, though, was the following excerpt from the earnings release:

China Mobile started to promote only its own WVAS products on the embedded menus of handsets customized for China Mobile pursuant to strategic alliances between China Mobile and selected handset manufacturers. In the past, such embedded menus promoted all best-selling WVAS products on Monternet, including many of KongZhong's products.

Because of these competitive pressures and the generally difficult environment, the company projected that second-quarter revenue could be down as much as 21% sequentially.

For the second quarter, analysts are currently estimating EPS of $0.06, though you can bet that they will be adjusting those expectations to account for the company's revenue projections. Assuming that KongZhong's gross margin stays at 53% and its operating expenses stay flat, it's very possible we'll see negative operating income for the company in the second quarter. The company does have a good amount of income from interest on its cash balances, so if it hits the midpoint of its revenue range or above, it'll likely just barely stay profitable on the bottom line.

After KongZhong's shares took a more than 20% punch in the nose on Tuesday, its market cap is now in the ballpark of $190 million. According to the earnings release, the company is sitting on a $115 million cash pile, providing at least some backstop to valuation -- assuming, of course, that it doesn't start burning cash in its operations. What this does mean, though, is that investors are putting a very low value on KongZhong's actual business.

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy has the Red Hot Chili Peppers' "Snow" as its ringtone right now. I bet you didn't know a disclosure policy could be that hip, did you?