Cashing In On Poker Mania

Market Comment

Online poker is big business. The industry is estimated to be worth as much as $1.5b a year, and existing players are cashing in on increased site traffic.

Currently, Sportingbet (LSE: SBT) is the largest listed online poker provider. Last year, Sportingbet bought Paradise Poker, which effectively transformed the online bookie into a less risky provider of poker games.

Whilst no games of chance are ever entirely risk free, providers of poker games are perhaps a notable exception. That's because unlike football and horse racing that can sometimes produce unexpected outcomes, poker providers merely take a rake, which is small percentage of each pot staked. The more people that play, the greater the rake of course.

Sportingbet is currently pencilled in for profits of £41m this year, rising to £58m in 2006. Its shares have more than trebled in the last four months or so. They currently stand at 289p, valuing the business at a pricey 24 times earnings and yielding a mere 0.6%.

Ukbetting (LSE: UKB) is another player that has benefited from poker mania. The company said in January that poker revenues grew by 356% in 2004. It added that non-sports betting now accounts for 60% of the group's gross wins. At 48p, shares its shares value the company at a similarly expensive 25 times estimated profits for 2005. Gaming Corp (LSE: GMC), which announced the launch of a new online poker site on Monday, is yet to be profitable. Nevertheless, the mere mention of its new poker website was enough to send its shares 17% higher to 9.5p, valuing the company at £15m.

Of more interest is the potential flotation of Gibraltar-based PartyGaming, which owns the online poker site PartyPoker. Details are sketchy at present but annual earnings of £190m have been mentioned for last year, and profits of £333m have been hinted at for this year. If these numbers prove correct, then even on modest valuation of 10 times earnings, PartyGaming could carry a price tag of £3b, which would catapult it straight into the FTSE 100. It is hard to look at the sudden popularity of online poker companies without feeling that a bubble is being formed. However, there is no denying that growth within the industry is real. The Fool recently opened a Poker board for example! According to the Gaming Board for Great Britain, only 4% of British adults admit to have gambled online in the last two years, which suggests there could be further growth for these companies.

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