GigaMedia Limited (GIGM)

TMFRedwood (< 20) Submitted: 6/30/08 12:24 PM : Start Price: $12.13 GIGM Score: -36.14

GigaMedia produces poker and casino software, as well as owns an online games business. The company has seen over 100% annual growth in its poker business over the past three years as US-based gambling sites dried up due to adverse legislation and the market expanded. Its online games business is also growing at incredible rates. Both of Giga’s businesses continue to have bags of potential.

Giga is unfathomably cheap, trading at 19x 2007 earnings and 15x 2008e enterprise value-to-earnings. These multiples for a company that grew net income by 43% in Q1 2008. This rate probably isn’t sustainable for four years, so conservatively modeling 20% growth for two years and 15% growth for the next two years, one could reasonably expect $90 million in earnings in 2012. Assuming a 15x multiple, the company would trade at $27 per share, or $22 in present value.

Another way to value the company is to discount its cash flows back to the present. Based on $48 million in earnings this year, and using a 3-stage DCF with 15%, 7%, and 3% growth, I arrive at a value of $20 per share. However I would be disappointed if the company only hit those numbers. Using 20%, 10%, and 3% yields a more realistic $26 per share.

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