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Tuomo Saarnio
Tuomo Saarnio
Articles (24)  | Author's Website |

This Net-Net Might Turn Around

GigaMedia is net-net stock with an interesting risk-reward ratio

October 25, 2017 | About:

GigaMedia Ltd. (NASDAQ:GIGM) is a holding company with a portfolio of businesses providing online games and cloud computing services. The company operates through two segments: Asian online game and service and cloud service business. It has online game operations in Taiwan, Hong Kong and Macau and a cloud computing software and services business based in Taipei.

Valuation

  • Market Cap: $36.91 million.
  • Price: $3.29 (Net Cash 5.12, Net-Net Working Capital 5.17, Net Current Asset 5.37).
  • Price/NCAV: 61%.
  • P/B: 0.6.
  • F-Score: 7.
  • Z-Score: 3.19.
  • Debt to Equity: 0.04.
  • EV/EBIT: 4.6.

GigaMedia is a Singapore-based company listed in the U.S. and headquartered in Taipei, Taiwan. GigaMedia is in essence a holding company that owns subsidiaries in varying businesses. Its main holdings comprise of online, mobile and casino gaming firms as well as cloud computing services. As GigaMedia notes in its annual reports, it operates in a highly competitive area in which differentiation is difficult.

Quantitatively, GigaMedia looks really like a deep-value play. Along with being priced well below NCAV, it is also priced below net cash value. If you owned the company outright, you could take its cash, pay off the debt and get more in cash than you paid for it. Further, GigaMedia is nearly debt free, not destroying its NCAV and has been growing net cash per share value. Even better, it has generated positive earnings in the past, although quality of earnings is not the best possible.

GigaMedia is trading at a heavily discounted value, meaning it is less likely to drop dramatically in value. A business selling well below net cash value is much less likely to decline further than other businesses. Any good news could increase the stock price significantly, and if the company does manage future growth and profitability the returns will be huge.

GigaMedia has a strategy of growth through acquisition and has been acquiring other local gaming companies, but it must be noted that the acquisition policies have not helped performance. Business strategy, which contemplates growth through acquisitions and strategic investments, exposes significant risks. The company has entered into multiple strategic alliances in the past and later recognized related impairment losses on investments and goodwill like acquisitions of Gamania and Strawberry Cosmetics. As GigaMedia's main asset is cash, and since it is on a path of acquisition to attain success, it seems that it will continue to spend cash until one of its subsidiaries becomes profitable.

In general the Asian online game and service business faces intense competition, which may adversely affect GigaMedia's revenues. More online games operating companies will enter the markets where GigaMedia operates in China, and a wider range of online games will be introduced to these markets, given the relatively low entry barriers to the online games industry and the increasing popularity of internet-based businesses.

In the second quarter, GigaMedia went through the transition to a new CEO, James Huang, and the management has been reviewing the business strategies.

In the past years, GigaMedia saw some big fluctuation in traffic for social games. In order to make the company’s business more stable, it now focuses on seeking licensed games that have the potential to be long-term hits. GigaMedia will launch a new game this year, and it is looking forward to improving performance and delivering positive operating income from mobile games that have long lifespans.

The decline in the popularity of PC-based online games and declines in the popularity of online games in general has been visible for a long time. Devices other than personal computers, such as mobile phones and tablets, are used increasingly to access the internet. GigaMedia believes that, for its business to be successful, it will need to develop versions of existing games, pipeline games and any future games that work well with such devices.

Also, the cloud services business may be a promising avenue of growth. Cloud services will increasingly comprise a larger percentage of the total business but will have to turn a profit in the near future to improve overall business performance. In 2016, after a review of GigaMedia's business plan, it combined GigaCloud cloud service business with its Asian online game business.

A member of the Koo family, Andre Koo, beneficially owned 19.54% of outstanding Shares. Ex-CEO Collin Hwang owns 6.1% company’s shares, and the new CEO James Huang almost immediately purchased a significant number (237,608) of GigaMedia’s shares.

How will GigaMedia turn around its business to be successful? Maybe it will develop a profitable game or games in accordance with the new strategy. Or maybe it will acquire another firm leading to increased profitability. Or it will still sell its business, investments or license rights as it has been doing in the past. Liquidation seems unlikely given that management has stressed that it is attempting a turnaround business through new actions.

Pros

  • Valuation: priced below NCAV and also below net cash value.
  • Heavily discounted value gives good downside protection.
  • Company’s net cash per share value is growing.
  • The cloud services business might be a promising avenue of growth.
  • A new CEO and strategy is a chance.
  • Insider buying.

Cons

  • Strategy of growth through acquisition exposes significant risks.
  • Highly competitive business and relatively low barrier of entry.
  • Operating losses have been the norm.
  • Profit based on selling shares of subsidiaries, other various investments or license rights are unsustainable modes of profitability.
  • There are currently no clear laws or regulations governing virtual asset property rights, in particular, in China, and therefore, it is not clear what liabilities, if any, online game operators may have in respect to virtual assets.
  • Wide and confusing organizational structure.

Disclosure: I do not own any stocks mentioned.

About the author:

Tuomo Saarnio
I am private value investor.
Alongside my own portfolio I’m managing my family and relatives investment accounts.

Visit Tuomo Saarnio's Website


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