Online Gaming Is More Than A Passing Fad - Friday 12th of August 2005

Online gaming is much more than just a passing fad as time-poor punters surf the internet on the hope of making a quick buck.

Despite online gaming companies trading at very high price-to-earnings ratios, more commonly reserved for blue chips with an excellent track record, talk of a bubble and comparisons to the ill-fated technology sector are unfair, say analysts.

The major difference between the two sectors is that the current players, PartyGaming PLC (PRTY.LN), Sportingbet PLC (SBT.LN), BETonSPORTS PLC (BSS.LN) and its peers, generate healthy earnings returns and have good growth prospects.

However, most analysts do concede that the current double digit growth rates of gaming is unsustainable and is likely to trigger widespread industry consolidation.

Altium analyst Greg Feehely rejects technology bubble comparisons, which culminated in the tech crash in 2000. "A bubble suggests that there isnt anything of substance underneath it in terms of profits or cash, which clearly is what was happening in the bubble."

"The difference between that and whats going in online gaming is the substantial cash and profits being generated, and the rate of growth has been very substantial," he said.

Deutsche Bank says "talk of a bubble is misplaced, given that many of these companies generate substantial profits, with European companies profiting from the gray area of US legislation."

PartyGaming, the worlds largest online poker operator which runs the PartyPoker website, is expected to report profit before tax and exceptional items of $500 million for the year ended Dec. 31, according to analysts.

The company recently raised GBP907 million via an initial public offering to U.K. and European investors. Since its debut on the London Stock Exchange on June 27, PartyGamings shares have jumped 44% from its 116 pence initial offer price, and trades on a forward PE of 24.63 times, according to FirstCall. The stock finished trading Friday at 168.1 pence.

With a market capitalization of GBP6.66 billion, PartyGaming is expected to be admitted next month into the FTSE 100-stock index - the U.K.s bellwether equity.

Shares in online and phone betting group Sportingbet have more than tripled to 382.25 pencesince its debut on the Alternative Investment Market in the U.K. in January 2001.

Sportingbet recently delivered an upbeat earnings outlook, forecasting a pre-items operating profit of GBP60.5 million-plus for the year ended July. 31.

BETonSPORTS, which offers online betting for U.S. sports, has also done fairly well since its IPO in July 2004. The stock is up 14% at 159.75 pence Friday from its 140 a piece offer price.

Last month, BETonSPORTS delivered a bullish earnings trading update, and said the integration of its recently acquired Asian online gaming business Easybets is progressing well.

As with most things, Asia is expected to play a big role in the expansion of the overall gambling industry.

Iain Wilkie, a partner at Ernst & Young, who works in the gaming sector, said online gaming operators are "generating significant profits and significant amounts of cash" in stark contrast to the tech companies, who were promising investors big returns, but most rarely delivered.

Asia Gambling Haven

With still a great deal of uncertainty surrounding U.S. law governing the participation by U.S. citizens in online gambling sites, Asia and Europe will come under the spotlight for companies looking to grow the business, say analysts.

Asia provides huge potential for both land-based and online companies, and there is room for both in the burgeoning gambling market, Wilkie said.

"One its a factor of size, and two its a factor of culture. Gambling is heavily embedded in most Asian cultures, and therefore its something that they just naturally endorse and embrace," he added.

Land-based gaming companies have already their sights on Macau, a special administrative region of China with a booming casino market.

Wilkie likens land-based and on-line gaming to that of watching a live sporting even, versus watching it on the box. "Its still the same game, but a very different experience."

There is room for both, but some cannibalism is inevitable, he added.

The current online gambling market valuation varies considerably depending on whether analysts use net or gross win numbers, according to analysts.

"The absolute size of the market is tricky to gauge, not least because the legality of the industry is questionable in several jurisdictions and many of the sites are run by private companies," Deutsche Bank said in a recent industry report.

Based on gross wins, the market is currently valued at between $12 billion to $14 billion, according to Altiums Feehely.

One sure bet is that the popularity of poker will continue to grow rapidly over the next few years. "Poker is growing fast, and its the chief engine of growth," Feehely said.

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