The stock of GigaMedia (NAS:GIGM, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $3.45 per share and the market cap of $38.1 million, GigaMedia stock gives every indication of being significantly overvalued. GF Value for GigaMedia is shown in the chart below.
Because GigaMedia is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. GigaMedia has a cash-to-debt ratio of 10000.00, which which ranks better than 100% of the companies in Interactive Media industry. The overall financial strength of GigaMedia is 10 out of 10, which indicates that the financial strength of GigaMedia is strong. This is the debt and cash of GigaMedia over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. GigaMedia has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $7 million and loss of $0.11 a share. Its operating margin is -24.94%, which ranks worse than 78% of the companies in Interactive Media industry. Overall, the profitability of GigaMedia is ranked 2 out of 10, which indicates poor profitability. This is the revenue and net income of GigaMedia over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. GigaMedia's 3-year average revenue growth rate is worse than 76% of the companies in Interactive Media industry. GigaMedia's 3-year average EBITDA growth rate is 39.1%, which ranks better than 72% of the companies in Interactive Media industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, GigaMedia's return on invested capital is -35.94, and its cost of capital is 1.91. The historical ROIC vs WACC comparison of GigaMedia is shown below:
In closing, the stock of GigaMedia (NAS:GIGM, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is strong and its profitability is poor. Its growth ranks better than 72% of the companies in Interactive Media industry. To learn more about GigaMedia stock, you can check out its 30-year Financials here.
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