COMMENT
Anyone For Poker?

Does anyone remember the scene from Bilko when Private Duane Doberman looked up sorrowfully at Bilko and asked, "Isn't poker just luck, Sarge?" Bilko replied, "Not the way I play it!"

In the good old days of black-and-white telly, poker was a face-to-face combat of wits. Not only did you require skill, but you also needed a Bilko-style poker face to pull off audacious bluffs too. Sadly, whilst many poker players had the former, not many had the face to go with it. But today, it matters little that you don't have a poker face. In fact you can even play poker on the Internet in your dressing gown and carpet slippers, and your opponents will be none the wiser!

It is in part the anonymity associated with Internet poker that has driven growth at online poker companies to dizzying heights. And none has grown more spectacularly than PartyGaming (LSE: PRTY), which made its debut on the London market this morning. Shares, which were offered for sale at 116p, rose quickly to 127p. This values the online poker company at around £5b, which guarantees it automatic entry into the FTSE 100.

PartyGaming, which owns PartyPoker, is the world's biggest online poker company. It is estimated to control almost half the online poker market, which has grown from around £300m in 2003 to nearly £750m last year. By the end of 2005, the industry is expected to be worth over £1 billion.

Online poker companies are not involved in poker games as such. Instead, they merely act as conduits between players, and take a cut from each pot. This cut is known as the "rake", so the more poker hands that are played, the bigger the "rake".

In the case of PartyPoker, growth in online poker has helped its revenues jump from £85m in 2003 to £334m last year. Profits have grown too, with net profits almost quadrupling from £42m to £193m in the same period. What's more, because the business model is completely scalable, net profit margins, which stand at 58%, could have further room for even further growth.

On valuation grounds, PartyGaming is expensive but not outrageously so. The company is valued at around 25 times 2004 earnings. It is also expected to pay a dividend, which is unusual for such a young business. The company has pencilled a total dividend payout of around £160m, which suggests a yield of 3.3%.

Before you whip out your cheque and pen, though, there is an ugly joker in the pack to consider. Online gaming is illegal in the US, and this also covers cross-border gambling. And since 80% of PartyGaming's customers are based in America, this could remain a thorn in its side until the position is clarified. The company insists it has not broken any laws, but this is something potential investors will have to weigh up for themselves. Personally, I'm quite fond of my shirt, and I don't intend losing it on a punt on poker-mania! 

> Cashing In On Poker Mania | What Poker Teaches Us About Investing