Small-Cap Spotlight: GigaMedia Worth the Gamble

Some may question the legal implications of this division given the recent ban of online poker in the U.S., but GigaMedia's operations are in the European markets. Thus far, the E.U. and the World Trade Organization has expressed interest in regulating and licensing the industry and a ban seems to be off the table.

Looking at GigaMedia's casual game segment, revenue increased almost 40% to $10 million from the last comparable period. However, margins decreased significantly to 23.3% from 26.7% last year, mostly due to the consolidation of T2CN, an online games operator based in Shanghai, China.

But this move appears to be only a temporary setback as its T2CN division gives GigaMedia the rights to operate some of its online games in China, which offers more than four times the expected growth offered in its primary market of Taiwan, according to estimates in a Bear Stearns research note. This will open up a significant future revenue opportunity for the company.

As mentioned above, the stock price has fallen 25% over the past month and this could be contributed to the delayed release of its Hellgate: London game in China which has been delayed to the second or third quarter of next year from a planned first-quarter release. Also, management announced that it has delayed the launch date for its real money Japanese games to the first quarter.

While delays are disappointing, usually they turn out to be great buying opportunities as this business will eventually come on stream, just at a later date. One only needs to look at the delays in Microsoft's(MSFT Quote) Vista operating system, which would have given investors the opportunity to purchase the stock in the mid to low $20's just weeks following its announcement back in March 2006.

Based on the catalysts mentioned above, shares have 20%-plus upside potential. Also, the downside risk seems limited, given the company's strong balance sheet. I would use the recent pullback as a buying opportunity.