One more arrest in relation to ownership in an online sports book and the internet gambling stock world is all aflutter. In July David Carruthers was arrested while on a flight stop-over in Texas and is charged by the federal government for owning and running an internet sports book. Carruthers is the now ex-CEO of the seemingly defunct betonsports.com. He could get a few years in prison and a huge fine for his crime. Just last week Peter Dicks was arrested while on a business trip to NYC. Dicks is a chairman for Sportingbet PLC and is being charged by the state of Louisiana, as opposed to Carruthers who is being charged by the feds. Dicks faces the possibility of a year in prison or a $25,000 fine. (My bet is on the fine, why do the taxpayers of Louisiana need to pay for this guy to spend a year in prison when he could be paying them instead?) Add the arrests to the chaos regarding internet gambling in US Congress. In the next month and a half the US Senate will vote on HR 4411, anti-internet gambling legislation. If this legislation passes the banks will need to completely redo their method of coding direct deposits as they will be required by law to block all deposits to online gambling sites. This takes the blocking that credit cards have done one step further, as players will not be able to direct deposit or use a check to deposit into an internet gambling site. In addition players will not be able to cash or deposit a bank draft or check from an internet gambling site, thus making winnings even more difficult to receive. Combine all of that, as if that wasn't enough, with signs that the popularity of poker is on the wane. PartyGaming's latest Interim Results show that while they have more players and the players are spending more per game, getting those players are costing them more as well. Their profits before tax, share option, and IPO-related expenses in their poker rooms from the first six months of 2006 has only risen six percent from the first six months of 2005. That shows that the industry has reached its peak and is now on the slow growth plateau. The United States holds over fifty percent of the online gambling worlds players and profit givers. This is a population that internet casinos, sports books, and poker rooms don't want to lose. All of this is wreaking havoc with stock prices. Blackmont Capital Inc. analyst Wojtek Nowak wrote to clients, "Legal risk in the online gaming sector is currently at a peak given attempted prohibition efforts in the U.S. Senate." This risk is affecting share prices in the London Stock Exchange. Internet gambling stocks have been reacting on a small yo-yo since July when they crashed across the $13 billion-a-year industry due to anti-internet legislation passing the House of Representatives. Just this past week industry leader PartyGaming plunged 19 per cent, 888 Holdings PLC 18 per cent and Playtech went down as much as 17 per cent on the London Stock Exchange. Analysts are trying to predict who will be affected by all of these variables in order to see which stock may be a bargain right now. David Shore an analyst at Desjardins Securities states, "Cryptologic and Chartwell (Technology Inc.) are the two main guys in Canada." "They don't operate any sites themselves and their customers that they license don't allow U.S. sports betting," he said. "So they should not be impacted by any sports betting crackdown." "That being said, we don't know whether the (Department of Justice) is focused on just sports betting, or if they're going after everything in online gaming," he added. On September 6th Fool.com published an analysis from Tim Beyers regarding the state of PartyGaming. Beyers is bullish on poker. "Just remember that PartyGaming booked $171 million in net profit on $473 million in revenue for the first six months of the year. That's an astounding 36% net profit margin. A company like that doesn't need hype. That's why I'm hoping today's action might trim down valuations on stocks within the online poker sphere. If it does, some very good stocks may soon trade at a healthy discount to their real value." However, he neglected to mention the upcoming Congress vote which could put a serious dent in PartyGamings parade and this article happened before Sportingbet's chairman was arrested in NYC. Two days later fool.com published an article by Richard Gibbons who actually likes the regulation situation in the US, stating that it is giving investors the potential to pick up a bargain. "Investors can also profit from regulation by exploiting the opportunities that arise when the market panics in response to new laws. For instance, the U.S. House of Representatives recently passed a bill banning certain types of Internet gambling. And while the bill hasn't passed the Senate yet, and it may not, fears about regulation have hit many online gaming stocks, including CryptoLogic, hard." "As a result, some companies possessing both huge growth rates and networking effects -- arguably the strongest competitive advantage a business can have -- are trading relatively cheaply. I've taken advantage of the volatility by picking up shares of CryptoLogic and PartyGaming." My money is on Neteller. The stock was trading at 894.23 pence just six months ago. Then HR 4411 gained momentum and the stock has been beaten and bruised since. They published their latest interim results on September 11th and the results looked good to me. Their revenue was up 62% over last year, net profit up 51%, and total active customers up 49%. If Congress passes HR 4411 they are the ones geared to make the most profit, as currently the bill says nothing about third party deposits into and from casinos. As banks can't guarantee that the money transferred into Neteller will end up in an online casino they have no real reason to ban it. Furthermore, they are expanding into the highly lucrative credit card industry. If the US does end up banning internet gambling it doesn't mean that the party is over. It just means the party has moved. Do you know how to say gambling in Chinese? Posted on: September 13, 2006
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