FortuNet (NASDAQ:FNET) has had quite a week. In the past five days it's advanced 150%, on word (so the press seems to claim) that it's received an OK to sell its wireless gambling devices to casinos in Nevada. (We're talking about handheld gizmos that would let allow you to, say, continue to play poker while you're sitting on the can at Harrah's (NYSE:HET), or dance with the one-eyed bandit while you pretend to watch your new girlfriend try on shoes at one of those Wynn Resorts (NASDAQ:WYNN).

FortuNet's splash into this as-yet-nonexistent market is, however, only a blurry reading of the headlines. The real situation, explained a bit more fully here, is that FortuNet didn't get an official OK, a contract, or anything else. It got a preliminary nod.

To his credit, FortuNet's marketing chief, Jack Coronel, seems to have spoken pretty frankly, telling the AP that it's unclear whether the company's devices -- already used for bingo, but due for an upgrade -- will meet technical regulations or be ready for trial.

Reality, anyone?
But investors don't seem to be parsing the language so carefully. At least not this week. FortuNet currently trades at more than 100 times trailing earnings, and more than 4 times the pie-in-the-sky guesses that analysts have put up for 2007 revenues.

I find that odd, because, on the heels of last week's announcement, the Street was much more skeptical. When the news was first released, the stock didn't really move much at all. Don't believe me? Check the chart. The news was released Thursday evening. Friday, it closed 11% higher. Then, it trades 110% higher over the next couple days?

My question is: Why the delayed reaction?

The cheering section
 I don't claim to have an answer, but I've got one prospect: some timely pumping by a bullish WR Hambrecht analyst. He's told news agencies he's "not surprised" by the run-up, since he figures it's worth $30 a share, based on aggressive revenue and profitability assumptions that, as near as I can tell, were pulled from thin air.

After doing a bit of digging, I'm not surprised that this valuation makes no sense. This appears to come from the same analyst who put a "buy" on publicity-hungry serial cash incinerator Altair Nanotechnologies, based on -- get this -- "discounted 2008 revenue estimates."

Discounted revenue estimates? Hey, I'm mystified too. And when I asked the finer financial minds around here what they thought of the notion, they just threw up in their mouths a little bit.

Nothing to see here!
It gets better. None of the stories I've seen have disclosed what I consider to be a salient fact: Hambrecht is hardly an outside observer here.

Hambrecht, after all, took FortuNet public in January, and slapped its first buy rating on the stock back in March. You can read all about that here.

I know, I know. Everyone will be swearing up and down that banking and research have nothing to do with each other these days. Chinese wall, etc. etc. I just don't buy it.

And speaking of not buying, that'd be a good policy with FortuNet.

Reversal of fortune?
I've got nothing against this biz -- except the price investors are now paying. This is no slam dunk, even if the market for these devices gets big.

FortuNet's margins have, until now, been in the mid-teens, but have been chopped in half during the trailing 12 months. And margin erosion ought to be a major worry, given that, in this market, it will need to compete against larger, established companies like International Game Technology (NYSE:IGT), Alliance Gaming Corporation, WMS Industries (NYSE:WMS), Bally Technologies (NYSE:BYI), and Shuffle Master (NASDAQ:SHFL), among many others. (I'm not big on any of these outfits at today's prices, either, for what it's worth.)

But even if I assume 15% margins and apply that to the most generous 2007 revenue estimates I can find, you need to slap a P/E of 37 onto the resulting earnings figure to get to the $30 Hambrecht target.

If you're wondering why I'm valuing the company based on hypothetical P/E ratios based on hypothetical sales and hypothetical margins, it's because that's the kinder way to do it. Discount hypothetical cash flows and I come up with a value of about $6 a share.

Put FortuNet's trailing-12-month margin of 8% onto that revenue wish, and you have to hope that Mr. Market is willing to put a multiple of 66 on a fantasy earnings figure, if you're going to get that Hambrecht price target.

Anyone running odds in Vegas would probably tell you not to make that bet. Unless you were the house.

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At the time of publication, Seth Jayson had no positions in any company mentioned here. View his stock holdings and Fool profile here. See what he's Digging these days. Fool rules are here.