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Internet gaming -- not a bubble waiting to burst

Posted by iTech - 2005-10-06

Last week's jittery flotation of Internet casino 888 highlighted the fraught nerves of investors who fear the Internet's latest boom is coming to an end.
Though shares of online gamers have lost much of their recent gains, a recovery could come as soon as next week when positive results from Sportingbet could give the sector a boost.

888's preparations for listing were dogged by a growth warning from poker giant PartyGaming in September and, when 888 finally floated, it did so at the lower end of the price range.

Even then, 888 lost 3 percent of its value on the first day of trading, taking the rest of the sector down with it as rival companies lost hundreds of millions of pounds in value.

Investors have been left wondering if the growth bubble has burst or whether this was just the latest swing in a volatile sector.

"There was a fundamental readjustment, but the question is to what extent is that purely fallout from PartyGaming," said analyst Paul Leyland at Seymour Pierce.


Analysts say online poker growth that last year topped 300 percent in some areas looks set to moderate to between 15 and 20 percent.

"There isn't an awful lot of top-line growth in the gambling market, and this has been the start of the dawn of that realisation," said Leyland.

Poker-focused PartyGaming is the undisputed sector leader with a market value of 3.8 billion pounds, compared to just over 1 billion pounds for nearest rival Sportingbet and 575 million for 888.

After listing in June, PartyGaming's shares soared 35 percent to its high-point of 179 pence in July, valuing the owner of PartyPoker and StarluckCasino at 7.3 billion pounds.

But since then it has lost nearly half its value.

"I hear the last 10 or 20 percent of that rise was due to U.S. fund managers who came late to the party," said analyst Robin Chhabra at Evolution Securities. "Some of them are nursing pretty big losses."


Goldman Sachs highlighted the confusion over PartyGaming in a research note on Monday.

"Is it still a growth stock? A cash cow? Or a busted flush with no top-line growth and declining operating margins?" said Goldman Sachs analyst Patrick Hargreaves. "The short answer is it is still impossible to tell."

Hargreaves says PartyGaming's shares could be valued anywhere between 110 pence and 122 pence, but without discounting for the risk it faces by operating in the United States, where online gambling is officially discouraged.

At the top end of that range, that would suggest the potential for its shares to rise 35 percent.

But investment bank UBS cut its rating of PartyGaming on Wednesday and said it had changed its view of the sector to favor groups with a range of products, preferably including sports betting.

"Our preferred investments in the sector are Betandwin, BetonSports and Sportingbet," it said in a research note.

Sportingbet gets 91 percent of its revenues from sports betting and the rest from casino and poker, while PartyGaming is over 90 percent poker-focused and 888 has a 65:35 split between casino and poker.

Evolution's Chhabra said the confusion could be ended next Wednesday when Sportingbet, owner of the Paradise Poker site fronted by American supermodel Caprice, reports its year results.

"I'd like to think the sector's reached the bottom and Sportingbet could turn the tide," he said. "The mood is now positive, but without concrete news, nobody is yet ready to pounce."

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