While the UK version of the Motley Fool writes about how the internet gambling bubble will burst soon, Playtech has gone public. What perfect timing. According to the Motley Fool the gambling industry is due to a stock bursting. "When star performers in a sector reckon they are too big to fail then it may be time to worry. For instance, what can be more damaging for a business than to face losing access to its biggest market? Yet key players in the online poker arena that include 888.com (LSE: 888) and PartyGaming (LSE: PRTY) have brushed aside the threat of a damaging US bill aimed at stamping out Internet gambling. The bill, which has been cleared by the House Financial Services Committee, will prohibit gaming sites from accepting credit card, cheques and any form of electronic fund transfer. Online gaming bulls think the bill is unenforceable but the legislation could put the US out of bounds to online poker and gaming sites." Fortunately for Playtech, David Kuo (the writer of the article) forgot some important details. This law would make depositing more difficult, but far from impossible. Players would simply have to open a Neteller or Moneybookers account. Neteller is based in the UK and isn't a gambling site, as such US citizens wouldn't be breaking any laws by depositing into Neteller and using Neteller to deposit into the online casino. As for the sites themselves, internet gambling sites are already illegal in the US but that hasn't stopped anyone from playing on them. On the other hand, if the US convinced Neteller or Moneybookers to stop accepting US players then the casinos might be affected, but as Neteller and Moneybookers make the bulk of their money from US punters I seriously doubt that's likely to happen.

Kuo had more reasons, which made total sense, for thinking the online gambling stock bubble would burst. "When a company such as Fairground Gaming (LSE: FGH) can raise £4m based on a business plan that involves buying up other players in the market then investors should perhaps take note. Fairground Gaming is currently valued at £25m, yet it neither generates a profit nor derives any revenue. Its sole purpose is to identify opportunities for consolidation in the smaller end of the fragmented online gaming sector." While I think he's spot on about Fairground Gaming (why would someone invest in a company that doesn't generate a profit or revenue – hello?) This situation definitely isn't the case with Playtech. They have a fabulous product and generate profit.

According to Playtech's announcement on their successful admission to AIM "In the two year period ended 31 December 2005, Playtech recorded a 268 per cent increase in revenues to US$47.6m. In the same period, post tax profit increased from approximately US$8.3m in 2003 to US$35.6m in 2005." Obviously there's a real company here available for investors. Playtech is not a new fly-by-night company. They were founded in 1999 and have grown since. In 2001 they had 2 licensees, and today they have 39. Their software platform runs 94 internet casinos, 15 online poker rooms and 15 online bingo sites.

Playtech's stock started trading on Tuesday 28 March at 8:00 am for 257 pence per ordinary share. They raised approximately GBP 265.2 million gross through a placing of 103,142,466 ordinary shares (the 'Placing Shares'). In the six days that the stock has been public and available the shares have gone up to 277 pence per share and is now (upon just looking) trading at 272 pence per share.

If other internet gambling stocks are a good indication, Playtech's stock should do well, even with the political unrest in the US. PartyGaming's stock went through the roof when their options went public last June, only to crash and burn when their first announcement was a warning in August. Their stock has recovered since then and is now trading at 133.00 pence per share. Empire Online became famous with their dramatic relationship with PartyGaming and their share is currently up +1.03% in the last day to 147.50 pence a share.

I would never recommend buying a stock for a company that does nothing (such as FairGround Gaming) but investing in a solid company makes sense. The internet gambling industry isn't going away overnight and Playtech is one of the main players in the software manufacturing end.

Right now gambling is a big trend. I accept that as a trend, eventually it will fall out of favor, but I see internet gambling in the same way I see internet shopping, as more people use the internet the only way it can go is up. People like the convenience of playing their favorite casino games online. It's considered an acceptable form of entertainment, as most people like to gamble for fun. Loads of people make money from gambling online, and not just in the stock market.

Gambling is based on hope. Everyone knows the house has an edge, yet the players still hope that they will walk away with winnings. The higher risk of the game the more money that player could potentially win. This is why slot machines are such great business. Logically they are the worst game in the casino, as they have the largest house edge, yet they are the biggest money makers. Why? People gamble on slots because they have hope – and this hope brings them to spend $16 on one game in the chance that they will win over one million dollars. The reality is that someone will win that money and so people will keep on gambling.

As the odds are better online than in land based casinos the chances are more people will gamble online – not less. If past behavior predicts the future then the trend toward internet gambling will continue to grow. Right now it's estimated to have ten percent of the US market, which is a lot considering it only started ten years ago. I think Playtech is a good investment for the long term, but then I'm a gambler with hope – so what do I know?

Posted on: April 7, 2006

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