Recent cynicism over the online gaming sector may present some good buying opportunities for investor, if you know where to look.
Online gaming companies were thrown into turmoil last week after US authorities arrested Peter Dicks, the chairman of online gaming site Sportingbet
(LSE: SBT)
. He was arrested for allegedly violating Louisiana State laws relating to gambling by computer. His arrest followed the arrest of BETonSPORTS
(LSE: BSS)
boss David Carruthers, who faces charges of racketeering and tax evasion in the State of Missouri.
Now, online gaming companies have long been aware that Internet gambling is illegal in America. For instance, PartyGaming
(LSE: PRTY)
pointed this out in its flotation prospectus. It said its operations may violate state law, and that violation of these laws can serve as a predicate offence for liability under federal statutes.
Nevertheless, gaming companies appear prepared to run the risk of flouting US laws. Perhaps it is because some outfits can ill afford to ignore the lucrative returns from American punters. For instance, 80% of PartyGaming's customers are based in the US, and 888 Holdings
(LSE: 888)
is heavily dependent on America, too. It generates over half its revenues from there.
But that is not true of all online gaming outfits. And the recent cynicism over the sector may present some good buying opportunities for investors.
Take Ukbetting
(LSE: UKB)
, which accepts bets on sporting events and poker. It generates 93% of its revenues from Europe and 7% from the rest of the world. But notably none of its revenues come from America. Significantly, it has adopted a policy from inception of not taking bets from the US. Following a number of years of losses, Ukbetting turned in a small profit of £0.4m last year, which is expected to rise to £2.2m in 2006. In 2007 profits are expected to increase to £2.7m, which values the company at 16 times earnings.
32Red
(LSE: TTR)
is another company that is not dependent on American punters. More than eight out of ten of its registered members are based in the UK, and they account for 90% of the company's revenues. Last month, 32Red said it may miss profits estimates after football's World Cup drew punters away from its online casino. This suggests the company may not achieve pre-tax profits of £3.6m this year. But next year, profits of around £7m have been pencilled in. This values the £50m Gibraltar-based company at roughly seven times earnings, which looks quite cheap.
Online gambling is unquestionably big business. At the turn of the Millennium online gamblers spent around £7bn a year on online gaming. But by 2005, this had ballooned to nearly £15b. And it is reckoned that growth may continue as the market develops and broadens its appeal to a wider audience.
But it is worth bearing in mind that online gaming companies exposed to the US, which is reckoned to be the largest single online gaming market, face risks. And while these risks remain unquantifiable, seeking businesses with little or no US exposure may be a better idea. Consequently, online gamers with exposure to the untapped Asian-Pacific regions and prosperous European countries may be a better bet. After all, just because you may want to invest in online gamers doesn't mean you have to take unnecessary risks.
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