GigaMedia Limited (NASDAQ:GIGM)

GIGM

It is early September 2007. The financial markets are in the midst of a credit contraction, treading slowly and painfully atop deep vats of subprime slime. Most market indices are off sharply from their record highs reached two months before. In this dangerously unpredictable environment, my buddy old pal MJKscorecard has tasked me – yes, tasked me in the way that Kirk “tasked” Kahn in the brilliant and hugely underrated Star Trek 2 – to come up with an investment idea that will brush these short-term worries aside (escape the Mutara Nebula intact) and deliver substantial long-term value for investors. And of course, destroy – no, annihilate – MJK’s picks in the process. For my inaugural CAPS pick in this competition, I can think of no better investment right now than Taiwanese online entertainment company, Gigamedia Ltd. (GIGM).

Why GIGM?
- a business model with tremendous scale and photon-torpedo-like profit margins
- 64 million registered subscribers for its online game and gambling services
- a marketplace for its products that is growing by leaps and bounds
- a strong pipelines of new games and offerings (like real-money Mah-jongg and Hellgate:London)
- revenue growth in excess of 80 percent
- $30 million in owner earnings
- a balance sheet with nearly $50 million in net cash
- MOST of all: NO SUBPRIME SLIME

Let’s take a closer look at that $30 million in owner earnings number and see if we can come up with a valuation model for GIGM given today’s current price. Let’s assume that investors are willing to pay a multiple of owner earnings equal to 1.5 times the growth rate at any point in time.

..............................................Owner Earnings........Implied..........Compound
Current........Hypothetical..........in 5 years..........Stock Price......Annual Stock
Stock Price....Growth Rate.......(in $ millions)........in 5 years..........Returns
============================================================
...$16.00............15.0%................$60.3..................$27.15..............11.16%
...$16.00............20.0%................$74.6..................$44.79..............22.86%
...$16.00............25.0%................$91.6..................$68.66..............33.82%
...$16.00............30.0%................$111.4................$100.25.............44.34%
...$16.00............35.0%................$134.5................$141.25.............54.59%
...$16.00............40.0%................$161.3................$193.62.............64.65%

As you can see, even if GIGM’s growth slows down (and it will) over the next 5 years, investors stand to make a bundle. Remember, these are annual returns!

Take it from me, this is a stock even Jean-Luc Picard would be proud of……..alright, I’ll stop I promise.