There are three basic questions here:

1. Does WPT Enterprises (NASDAQ:WPTE) have a business or not?

2. If so, is parent Lakes Entertainment (OTC BB: LACO) the better value?

3. And if so, should you be willing to touch Lakes with a 10-foot pole?

It's funny how things change.

Back when I bought Lakes Entertainment shares in November 2003 (which I have since sold), here's how I looked at it: At about $135 million and roughly $6-$7 per share (adjusted for a 2-for-1 split), the stock was trading at a discount to what the company had accounted as book value and was a steal if the World Poker Tour (WPT) -- of which the company owned 80% at the time -- was worth anything at all.

But since WPT's IPO last August, my view on the worth of the two entities as investments has changed considerably.

For one thing, even after WPT's stock's recent pullback to $13.02 at Tuesday's close -- the day after the company's second-quarter earnings release, and down from last month's $29.50 high on word of a $700 million takeover "bid" -- WPT itself carries a roughly $260 million market cap. This market cap is mostly based on the potential of WPT Online, the company's new online gaming site. So at the moment, Lakes' present 62% share of WPT has a market value of about $160 million.

At Lakes' current price of $12.63 per share and a $280 million market cap, that means that the rest of Lakes is being valued at about $120 million.

As of Lakes' most recent filing -- coming after last year's third quarter ended Oct. 3, 2004 -- the company carried a book value of about $173 million, for a $50 million-plus gap. However, $90.9 million of that consists of loans made to Lakes' Native American partners for the potential development of casinos that Lakes would then manage for a fee.

That $90.9 million may be worth as little as zero (or more than $90.9 million) and is the source of some controversy with the SEC, which has precluded Lakes from filing quarterly reports, as well as last year's 10-K.

We'll get into that in Part II. But first, let's take a look at WPT's second-quarter earnings before we tackle Question 1.

WPT's second quarter
WPT's second-quarter report itself told us nothing we didn't already know. In other words, the $6.6 million in revenues and $0.4 million loss -- or $0.02 per share -- for the quarter say that the television business and product licensing alone obviously don't make a $300 million company. They probably don't make a $260 million company, either.

WPT did expense an additional $1.6 million related to the new Professional Poker Tour (PPT) -- which accounts for a swing to a loss from the $0.9 million profit recorded in last year's second quarter. The pending PPT series will be a professionals-only series that the company says it is "close to signing a licensing agreement for."

On the earnings conference call, management suggested that any PPT deal would be on more favorable terms and, thus, bodes well for future profitability. But for the most part, the second-quarter results are pretty inconsequential.

As we've said before, if WPT is to justify its $260 million market cap, WPT Online must deliver. The online poker site officially launched at the end of the second quarter. Interestingly, the company accounted for zero contributions from online gaming in its third-quarter forecast, instead noting that any significant contributions may not come until toward the end of the year, if not next year.

Question 1: Does WPT have a business?
Potentially. The online gaming world currently consists of Party Gaming's (LSE:PRTY) No. 1 site, PartyPoker, as well as a bunch of second-best players in a list topped by Poker Stars and OnGame's I don't necessarily think that will change, but I believe WPT stands to be a player in emerging markets.

The key word is "emerging."

Like Motley Fool Hidden Gems selection Cryptologic (NASDAQ:CRYP), WPT won't take wagers from U.S. players, and the company views the U.K. online market as saturated with competition. But in other fledgling international markets, the company will be able to leverage its increasingly valuable brand and reach. In addition, the company's TV show offers a tremendous -- and tremendously cheap -- marketing advantage.

Leader Party Gaming, which held its IPO in June, earned a whopping $345 million on roughly $600 million in revenues in 2004 -- the latter figure representing more than half of the online poker market. The company benefits from both Motley Fool Stock Advisor pick eBay-like (NASDAQ:EBAY) network effects and an even more favorable business model. As a result, Party Gaming carries a market cap north of $12 billion.

Frankly, WPT is not going anywhere near those figures, but there is plenty of money to be made, even among second-best players. According to my colleague David Kuo at Motley Fool UK, No. 3 OnGame is rumored to have annual operating earnings of about $18 million on about $54 million in revenues. And if WPT -- with its superior brand, reach, and marketing advantage -- can do even half of that in two years, I think WPT shareholders will be in good shape at WPT's current $260 million price tag, given that the growth machine will have been set in motion.

Buy WPT?
As a value investor, the problem with WPT is that I think there is either an upside or a downside, but not much in between.

From a business standpoint, WPT is in decent shape, as the company's media and product licensing businesses are profitable -- if marginally so at this point -- and is building a brand cheaply that it will leverage into bigger profits in online gaming. But from an investment standpoint, the stock is a bit of a gamble: The online business could be worth zero, in which case the stock is probably worth about half its current price. And it's going to be at least the end of the year before anybody visiting WPT Online believes otherwise -- the site is mostly deserted at present. (I'd advise anyone interested to download the software and try the "play money" games.)

But if WPT Online turns out to be worth anything at all -- and I believe there is a good chance it will be -- there is certainly an upside in the stock. If you're the gambling type, now might be the time to go for it.

Otherwise, there are a couple of investment alternatives. For one, a couple of weeks ago, Fool contributor Jim Gillies made a good case that Cryptologic is a value at its current price and is a considerably safer play with an existing, profitable business and one-third of its market value in cash. And like Party Gaming, Cryptologic also pays a dividend. But unlike WPT, only about a quarter of its business is currently poker-related.

That said, if you're looking to get WPT for value, you can either wait for the stock to drop further or consider watching the spread between the market values of WPT and parent company Lakes Entertainment.

Stay tuned for Part II, when I discuss this matter in more detail and answer Questions 2 and 3.

Cryptologic is a Hidden Gems pick, and eBay is a Stock Advisor pick. For a free 30-day trial, click here and here, respectively.

Fool contributor Jeff Hwang owns shares of eBay.