Online gaming company 32Red (LSE: TTR) revealed that net gaming revenues for the first half of 2015 grew 22% to £18.6 million, following rapid growth in Italy and continued investment in customer service and marketing.
Its latest trading update also offered some negative news. 32Red spent more money to attract new casino customers this year, as customer acquisition costs rose £17 per person on last year, to £197. In addition, casino player yields fell 5% to £380. Although that still leaves a huge profit margin for its casino business, the latest trading update confirms the trend of increasingly expensive customer acquisition costs and declining profitability per customer.
With continued momentum in earnings growth, 32Red’s valuation is attractive. It currently has a P/E ratio of 15.4, but as analysts expect underlying EPS will grow 26% to 5.9 pence in 2015, its forward P/E is just 12.0. For 2016, analysts expect underlying EPS will grow by another 49% to 8.8 pence, which means 32Red’s shares trade at 8.1 times its expected 2016 earnings.
Shares in 32Red fell 2.9% to 70.4 pence in morning trading.
GVC Holdings and Bwin.party Digitial Entertainment
GVC Holdings (LSE: GVC), which owns the sportingbet and Casino Club franchises, is considering making another rival bid for Bwin.party Digitial Entertainment (LSE: BPTY), after the latter agreed to 888 Holdings’ (LSE: 888) offer last week.
An acquisition of Bwin.party could turn out to be a negative for GVC, as Bwin.party has a heavy presence in uncertain regulatory markets, and its online poker business is exposed to a structural decline in the market. Its limited operating cash flow would also put pressure on GVC’s dividend policy.
Analysts expect underlying EPS will grow by 8% to 49.6 pence in 2015, which means its shares have a forward P/E of 8.7. On top of this, GVC has an attractive indicative dividend yield of 9.3%.
Betfair (LSE: BET) is probably the best gaming franchise of the four, but it is also by far the most expensive. With a strong management team in place, the company has introduced a savvy advertisement campaign and launched many innovative features. Betfair’s popular betting exchange gives it a strong competitive advantage over its peers, because network effects tend to lead to a single dominant platform.
Diversification offers valuable revenue synergies, and Betfair is particularly strong at cross-selling casino, poker and bingo products. With a strong sports betting franchise, it uses introductory offers and internal advertisements to lower its external casino and bingo customer acquisition costs.
Underlying EPS has grown by an average compound rate of 29.7% over the past five years. After a strong set of results in 2014, analysts currently expect underlying EPS will decline by 4% to 76.3 pence in 2015/6, which implies a forward P/E of 34.4. Underlying EPS is also forecast to grow by 19% in 2016/7, to 90.5 pence, but that still leaves Betfair trading at 29.7 times its expected 2016 earnings.
Cheap and fast growing
In conclusion, 32Red’s shares seems to offer the best balance between value and growth. But as 32Red is a small-cap company, investors should also be prepared for greater volatility.