Why Betfair Group Ltd Is A Better Buy William Hill plc & Digital Entertainment Plc

Betfair’s (LSE: BET) product innovations and its marketing campaign helped it to drive full-year revenues 21% higher to £476.5 million. Earnings per share (EPS) rose 62% to 79.5 pence.

Operating expenses for the year rose £14.1 million to £265.7 million, even as sales and marketing expenses rose 10% to £136.1 million. This helped EBITDA margins to rise from 23.1% last year to 25.2%.

Betfair is showing the success of its savvy “Tap Tap Boom” marketing campaign, which highlights the simplicity of its mobile betting platform. Mobile gaming revenues now represent 33% of its total, up from 6% two years ago. Ease of navigation and introductory incentives have also led to cross-selling of multiple gaming products, ranging from poker to bingo and online casino.

Betfair is better known for its betting exchange, where the company takes commissions from matching bets between different customers. Although the betting exchange is a less capital-intensive business, liquidity is usually concentrated in the large sporting events. This reduces the appeal of Betfair to new customers, which is why the company launched its own bookmaking business to extend its coverage to a wider range of markets.

Sportsbook, its bookmaking business, is attracting more customers to Betfair, because of its greater simplicity to customers that are more familiar with traditional bookmakers. But, there are synergies with running the two businesses alongside each other. Through “Price Rush”, Betfair could offer its Sportsbook customers better odds, if higher odds are available through the exchange. Product innovations like these increase value for customers, and strengthens Betfair’s competitive position. Its betting exchange also improves its brand awareness, by being a unique unbiased market.

Betfair has a high forward P/E of 35.7, but the premium seems well deserved because the company is seeing rapid revenue growth and has captured market share from its competitors. With its trendsetting product innovations, Betfair will likely continue to deliver much faster earnings growth than William Hill (LSE: WMH) and (LSE: BPTY).

William Hill

Traditional bricks-and mortar-bookmaker William Hill is seeing much slower revenue and earnings growth. Adjusted EPS rose just 4% to 29.9 pence in 2014, even as the company is showing strong growth from online, where revenues have grown by a compound annual growth rate of 21% since 2009.

2015 will be a much more challenging year for William Hill. The increase in the Machine Game Duty cost the company an additional £20 million in the first quarter alone. William Hill has £14 million shortfall, as a series of customer friendly football results were unexpected. This also highlights the value of Betfair’s betting exchange, which reduces the bookmaker’s exposure to one side of the game.

William Hill’s forward P/E is 17.3, with analysts expecting earnings will decline by 18%. Digital Entertainment

Bwin.Party had said that several gaming companies are interested in acquiring the company, but the selling down of its shares from two of its largest shareholders seem to suggest that the prospects of its takeover is unlikely.

Emerald Bay Limited and Stinson Ridge, owned by former co-founders of Partygaming, sold 49.5 million shares, even as two interested parties, 888 Holdings and Sportingbet owner GVC are said to be preparing for a bid for the company.

Despite the company’s online and mobile focus, revenues have fell 6% to £611.9 million in 2014. The company has been hit hard by its focus on uncertain regulatory markets. It faces a 5% turnover tax in Germany, and the company has pulled out of Greece due to consistent loss-making. With a forward P/E of 21.7, is unattractive for investors and potential suitors.

More investment ideas...

Building a successful investment portfolio does not only involve picking winners. Reducing trading costs and minimising your tax liability are just as important to building wealth. The Motley Fool has a free special report called: "Your 10 Step Guide To Making A Million In The Market".

This guide will show you the value of compounded investment returns and the importance of thinking for yourself. 

It's free, and there's no further obligation.

Click here to get your free copy.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.