Make a bet on CryptoLogic? - Tuesday 12th of April 2005

CryptoLogic Inc. is cashing in on the on-line poker craze. But with the stock already up sharply, should investors be holding or folding?

Shares of CryptoLogic -- a Toronto-based provider of software to the on-line gambling industry -- have doubled in the past six months, propelled by solid quarterly results and the public's growing fascination with poker, both on the Internet and in televised tournaments such as the World Series of Poker.

With more than 200 poker sites worldwide generating annual revenue of about $2-billion (U.S.), there's a growing pot of cash at stake for CryptoLogic and others vying for a piece of the action.

"On-line poker is expected to be one of the primary growth drivers for CryptoLogic over the coming year," Paradigm Capital analyst Gabriel Leung said yesterday in initiating coverage of the company with a "buy" rating.

Rising broadband usage, increasing confidence in Internet security and the ease of gambling on-line compared with travelling to a casino all bode well for on-line poker, he said.

As well, the new U.K. Gambling Act will enable regulation of Internet gambling and "significantly boost the credibility of the . . . industry, as well as provide a regulatory blueprint for other nations" such as the United States, which lacks clear laws on on-line wagering.

CryptoLogic's software brings together players from different on-line casinos such William Hill, UK Betting and Ritz Club London into a virtual poker room where they face off against each other. The company's virtual card table ranks among the top five poker sites in revenue, although it remains well back of industry leader PartyPoker.com.

But with all the buzz about poker, "there's no end in sight," CryptoLogic president and chief executive officer Lewis Rose said in February, after the company announced that fourth-quarter revenue soared 33 per cent to $17.9-million and profit rose 25 per cent to $3.8-million or 27 cents a share.

"CryptoLogic saw the large untapped market opportunity of on-line poker and we leveraged our reputation for innovation and strong brand named licensees to establish a very significant position," he said. "This approach has paid off in spades."

Investors don't need any convincing. Yesterday, the shares gained 60 cents (Canadian) to close at $36.86 on the Toronto Stock Exchange, up 40 per cent in the past 12 months. On the Nasdaq Stock Market, they added 35 cents (U.S.) to $29.52.

With the stock already having a nice run, however, one analyst is advising investors to sit out this hand.

"They're one of the best vendors on the street for casino and poker software," Canaccord Capital analyst Greg Harris said of CryptoLogic. "The one thing that has happened, though, is that the Street has priced in very well the growth prospects that we see right now."

Mr. Harris has a 12-month target of $29 and rates the stock a "hold."

The shares could get a lift if CryptoLogic acquires one of the larger poker sites, said Mr. Leung, who has a 12-month target of $38 on the shares.

Acquiring a U.S. site, in particular, would benefit CryptoLogic by complementing its existing network of largely European players, he said.

Bettor returns

CryptoLogic is cashing in on the on-line poker craze. But with the stock already up sharply, should investors be holding or folding.

Company snapshot

Headquarters: Toronto.

Yesterday's close: $36.86

Change from previous: up 60ΒΆ

52-week intraday high: $42.12

52-week intraday low: $15.75

P/E ratio, trailing: 29.84

Dividend yield: 0.67%

Market cap: $483 million

Price / book ratio: 5.45

1-year total return: 50.85%

YTD percentage change: 22.99%

Revenue, fiscal 2004: $63.7 million

Profit, fiscal 2004: $13.7 million

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