Small-Cap Spotlight: GigaMedia Worth the Gamble

I expect Everest Poker to provide the stable and predicable revenue growth that analysts are currently expecting, while GigaMedia's other online games offer significant potential if they secure a major following. Success on both those fronts should create opportunity for increased fees and a higher rate of growth in the coming years. Increased analyst coverage could also prove to be a catalyst for investors, as Bear Stearns is the only major Wall Street name to have initiated coverage up to this point.

Frank: Pullback Creates Buying Opportunity

GigaMedia has almost every quality you want in a small-cap stock. The company has huge growth potential from its two major divisions, several catalysts heading into next year and a strong balance sheet. Add in the international exposure and the fact that shares have pulled back 25% from their November high, and I believe the stock is a buy here.

GigaMedia's gaming software segment accounted for almost 70% of the total revenue last quarter, primarily through Everest Poker. The segment is a huge growth driver, as operating margins from poker are 32.5% and it delivered 162% year over year, led by an increase of over 50,000 new players over the last three months.

The strength of these results surprised some, as management said on the latest conference call that the third quarter is seasonally weak. People play less poker online during warmer months and more during the colder months, and while the current quarter will likely include colder weather in the company's target market, we could see an earnings beat that drives a good short-term trade.