Slower growth in Partygaming's poker business is offset by rapid expansion of its online casino offerings.
PartyGaming
(LSE: PRTY)
has all the attributes of a great Internet business. Its offerings are interactive; they allow user-input and provide some sort of social interaction. Also, unlike many Internet businesses, the company has a clear idea how to make money.
Unfortunately, the industry is also fraught with uncertainty, especially after the arrest of David Carruthers, former CEO of BETonSPORTS
(LSE: BSS)
, in the US on racketeering charges. And now today we learn that the chairman of Sportingbet
(LSE: SBT)
, Peter Dicks, has also been arrested in the States. Let's hope the PartyGaming directors are more careful!
Many observers are also concerned that online poker may be a short-lived fad.
Today's interim results indicate there may be something to this. Gross revenue from poker increased 55% between 2004 and 2005, but this number only rose 26% over the last year.
What's more, "clean" EBITDA from poker, which excludes IPO and share option expenses, increased 12% while profit before tax only rose 6%. These figures reflect the large amount of money that Party has had to spend on marketing. Indeed, anyone watching television will notice how often online poker companies run tournaments to drum up business.
All this suggests we should not be too optimistic about the growth prospects.
On the other hand, Party's online casino operation is growing quickly. Revenues are up 527% to $159 million (£85m) and profit is up 699%. This looks terrific, but the extent of the public's appetite for online gambling is uncertain. And there is additional regulatory risk. Poker is arguably a game of skill, casinos games are gambling pure and simple. Therefore, regulators may take a harder line on online casinos.
Party also started running a sports book when it acquire Gamebookers.com. This business is "non-US facing", so has fewer US customers and is less susceptible to prosecutions in the US.
However, it isn't only the authorities in the US that shareholders should be worried about. In Germany the legality of online gaming is being questioned. Last month the German state of Saxony revoked the licence of an Austrian online sportsbook, Bwin.
On the positive side, earnings are up 42% to 8.8 cents (5p), and Party has been repairing its balance sheet. It now has net assets. It has also declared an interim dividend for the first time -- 3 cents or 1.6p. Brokers are forecasting 4.86p for the full year, which would mean a yield of 4.1%. If the forecast earnings of 9.27p are attained, the company would have a price-earnings ratio of 12.7.
At first sight this looks fairly good value. But given the regulatory risk and uncertainty as to the sustainability of its core business, it might be prudent to demand a bigger discount.
More: Three Signs Of A Poker Bubble
