Small-Cap Spotlight: GigaMedia Worth the Gamble

In this week's Small-Cap Spotlight, Frank and Larsen dig into GigaMedia(GIGM Quote), a Taiwan-based provider of real money gaming software and online games.

Larsen: Short-Term Volatile; Long-Term Win

Don't get me wrong, the business of online gaming, particularly online gambling, is a far cry from a traditional industry. But U.S. investors seem overly skeptical toward GigaMedia, a company whose success relies heavily on online gambling, an activity that's illegal in this country.

When looking at GigaMedia, small-cap investors should set aside those ingrained prejudices and accept the fact that online gambling is far more accepted on an international scale, and therefore a company like GigaMedia, which operates across Asia and Europe, offers a unique investment opportunity.

The company's primary long-term driver is the Everest Poker product, which analysts say is a top-five online gaming poker site in terms of traffic. Everest Poker is on track to almost triple its revenue in 2007, following up a 144% growth rate in 2006.

Analysts at Bear Stearns, which initiated coverage of GigaMedia less than two months ago, see Everest Poker's revenue growth stabilizing in the 20% to 30% range over the next three years, with 2008 revenue expected to hit $117 million. This relatively slower rate of growth could provide a catalyst if the company beats expectations over the next year.

Small-Cap Spotlight: GigaMedia Gets the Green Light

In addition to its poker business, GigaMedia has a diverse stable of non-gambling games -- FunTown, FreeStyle and Hellgate: London, a first-person shooter-style role-playing game, which is actually a MMORPG (massively multiplayer online role-playing game) -- that established communities of gamers but have yet to show the potential for the same large financial returns as Everest Poker. These games have the potential for additional revenue generation as GigaMedia leverages their popularity and strong user communities.