A Dow Jones story
22.08.2005LONDON (Dow Jones)-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 isn't anything of substance underneath it in terms of profits or cash, which clearly is what was happening in the dot.com bubble."
"The difference between that and what's 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 world's largest online poker operator which runs the Party Poker 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, PartyGaming's 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.
