After a recent high-profile buyout announcement in the same sector, it may be time to kick the tires of long-time underperformer, but cash rich small cap SourceForge, Inc. (Nasdaq:LNUX).

In mid-May, online tech news and information provider CNET Networks Inc. (Nasdaq:CNET) agreed to be acquired by CBS Corp. (NYSE:CBS) for $1.8 billion. The price paid for CNET represented a hefty 45% premium over its stock price the day before the deal was announced. The CBS take-out of CNET followed months of pressure by a group of CNET shareholders to sell the large, but struggling, company. The CNET announcement could place pressure on the remaining, small publicly held Internet media companies to find merger partners.

One such name is $92 million SourceForge. Formerly known as VA Software Corporation, SourceForge changed to its new corporate name last year after the sale of its software business to CollabNet. The Mountain View, Calif.-based company’s remaining operations include its namesake SourceForge.net website, which hosts more than 170,000 open source software projects. SourceForge also runs IT community and news-focused websites Slashdot.org, Linux.com, FreshMeat.net, ITManagersJournal.com and NewsForge.com. SourceForge also operates a niche e-commerce operation called ThinkGeek.com. All told, SourceForge claims that its network of websites reaches 32 million unique visitors each month. 
 
While SourceForge has a strong position in a valuable segment of the online media space, serving technology professionals and enthusiasts, it has been unable to translate this position into sustained profits. SourceForge management has attracted a reputation in recent years for unfulfilled promises and missed guidance. After SourceForge reported another quarter of disappointing results at the end of May, Trivium Capital, the company’s second-largest shareholder, called on SourceForge to either seek strategic alternatives or announce a significant stock buyback. Trivium pointed out that SourceForge, as of the most recent quarter, was sitting on a cash position of $0.82 a share with “possibly” another $0.10 a share in value from its stake in CollabNet. On Monday, SourceForge established a new 52-week low of $1.35.

SourceForge’s most recent results show a company trying to “invest its way” to growth and sustained profitability, but so far with limited success. For the quarter ended April 30, SourceForge’s revenue rose 15% to $11.8 million, while operating expenses leapt 35%. Over the first nine months of this fiscal year, revenue rose nearly 24%, while operating expenses have increased 47%. Excluding the impact of stock based compensation, non-GAAP income from continuing operations for the most recent quarter was $0.1 million, or breakeven a share, compared with non-GAAP income from continuing operations of $2.1 million, or $0.02 a share, a year ago. A bright spot in the quarter was the e-commerce segment, which saw its revenue rise 29% to $6.7 million. Revenue in the online media segment, on the other hand, inched up less than 1% to $5.1 million. Cash and investments stood at $56.6 million at the end of the quarter.

At a recent enterprise value of $38 million, the market is valuing SourceForge at just 0.6 times next year’s expected revenue of roughly $65.5 million. Analysts estimate earnings for the fiscal year ended July 2009 at $0.06 a share. If SourceForge can get back to its operating margins of a year ago, run-rate earnings of $0.08 a share are possible. Value this potential EPS at a reasonable 16 times and add in around $0.80 a share in cash and you get a stock price north of two dollars a share, or at least 40% upside from current levels. The 52-week high of $4.45 was set last June.

Given SourceForge’s depressed stock price, lowly valuation and outsized cash position, the stock looks ripe for an experienced activist investor or two to rattle the company’s cage. While SourceForge has changed up several senior management positions over the past year, the top spot has remained unchanged. Somewhat surprisingly, Ali Jenab, the company’s CEO since 2002, hasn’t yet been shown the door. SourceForge’s management and directors as a group hold just a little over 5% of the stock. Fidelity is the company’s largest shareholder with a 12% stake.

A slowdown in online ad spending is a concern, as well as the company’s seemingly lackadaisical attitude to maximizing shareholder value. On the plus side, recent pressure by large SourceForge shareholder Trivium Capital could prompt the company to shape up. For medium risk-oriented investors, this looks like a small cap which offers a favorable risk and reward below the $1.50 level.