Small-Cap Spotlight: GigaMedia Worth the Gamble

On the fee side, GigaMedia has received the right to operate Holic, a cutesy fantasy online game with colorful environments where player can complete quests. Earlier this year, the company purchased the rights to operate both of these games for a license fee and running royalty fees in the low 20% area.

Shares of GigaMedia have been extremely volatile over the past six months, mainly due to the speculative nature of the name and the far-from-certain future growth rate. Shares enjoyed a strong run to $25 from $10 from August to November, as the investment community became more aware of the company's significant potential.

Clearly a momentum play during that period, the stock suffered a brutal selloff when its momentum-based strength faded in early November, with shares plummeting more than 30% in less than two weeks. Since then shares have stabilized somewhat, due in part to third-quarter results released Nov. 14 that were ahead of consensus estimates.

Recently trading around $18, shares of GigaMedia are an attractive speculative play for investors looking for a foreign small-cap play that offers big upside. On a price/earnings basis, the stock is very reasonable, trading at 19 times 2008 consensus estimates (currently 94 cents a share). Keep in mind that earnings are expected to grow more than 40% next year, and the company has zero long-term debt on its balance sheet.