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Will Poker Stocks Fold?
Published: 2005-09-06
 By Tim Beyers (TMF Mile High)
September 6, 2005
Suddenly, poker isn't as hot as we thought it was. Or is it? Early this morning here in the U.S., London-based PartyGaming (LSE: PRTY) announced that it expected slower growth rates from its online poker business in future quarters, according to Bloomberg. (You can download a PDF of the press release here.) The company, which trades on the London stock exchange, promptly lost more than $4 billion of its market value.
Is this really the end for poker? Hardly. PartyGaming simply said growth rates would slow. That happens to every business, especially as its market expands. In the case of online poker, the market has grown exponentially -- from $90 million in 2002 to $1 billion in 2004, according to Christensen Capital Advisors. Part of the reason is the onset of competition from WPT Enterprises (Nasdaq: WPTE) and Sportingbet (LSE: SBT), which runs the Paradise Poker website.
What's more troubling, to me at least, is that PartyGaming gave an excuse for slowing growth when it didn't need any. According to Bloomberg, CEO Richard Segal said the late airing of the World Series of Poker (WSOP) on ESPN could have hurt results. (The schedule of events began on July 19 in the U.S. and on Aug. 23 in the U.K. It began on July 6 last year.) This is a weak explanation, at best. Research from PokerPulse -- which PartyGaming ironically mentioned in its earnings release -- shows that the site handles more than 40% of online tournaments. With more than 5,000 entrants in this year's $10,000 buy-in No Limit Hold'em event, the vast majority of whom came from online qualifying tournaments, I find it hard to believe that this year's WSOP did anything but help PartyGaming's results.
The simple truth is that poker's a bigger industry now, and that makes comparisons tougher. Frankly, that's good. Poker stocks' valuations have been built on quite a bit of hype. PartyGaming's declining growth rates have proven that -- pardon the pun -- the party can't go on forever. If investors overreact, that could lead to a wicked hangover for some current shareholders.
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.
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PartyGaming warns of online poker slowdown
Published: 2005-09-06
PartyGaming shares lost a third of their value after the online gaming company hinted that the boom in the popularity of online poker may be starting to wane.
In its maiden set of results since listing this summer, PartyGaming said pre-tax profits rose 21 per cent to $186.3m in the six months to June 30 on revenue up 81 per cent at $437.4m.
But PartyGaming's shares fell 52ūp to 104p in mid morning trade as the internet gambling group said it expected good year-on-year growth in the second half, but "at rates lower than the substantial rates previously experienced".
Martin Weigold, finance director, offered a cautious assessment of PartyGaming's chances. "I think that the rate of moderation of growth in the poker market might be slowing more quickly than anticipated," he said.
"At this stage it's difficult to know whether the trends that we're seeing in active player days are a blip or part of a longer-term trend," he added.
The broadcast of the World Series of Poker started at end of August, rather than at the beginning of July as it did in 2004. The company said this could have resulted in the slower than expected customer growth since the end of the interim period. In addition, analysts said new casual customers are spending less time and money than the original hardcore members, known as "whales".
PartyGaming said it will lower its spending on advertising and marketing and prioritise customer retention.
Stripping out expenses and share option charges relating to the company's initial public offering in June, earnings before interest, tax, depreciation and amortisation (ebitda) were up 70 per cent to $257.7m.
Despite the cautious outlook for the second half, poker has been the driving force behind the group's interim results with poker revenues up 89 per cent to $412m.
However, following its listing on the London Stock Exchange in June, PartyGaming has faced increasing competitive pressures in the key US market. The group is seeking to expand into other countries as well as diversifying away from its core poker market.
Despite acknowledging plans to grow through acquisitions, Richard Segal, chief executive, would not reveal whether PartyGaming would put in a counterbid for Empire Online. Sportingbet, the Aim-listed online betting group, confirmed on Monday that it was in takeover talks with Empire.
Mr Segal said of the move: "We've seen Sportingbet's announcement and we will monitor developments."
However, PartyGaming did announce on Tuesday a deal that would allow gambling on mobile phones. By downloading an application, customers will be able to play games such as roulette. A poker application will be released in the near future.
Copyright 2005 Financial Times
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