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Published: October 21, 2009
The gambling business is a license to print
money. Everyone knows that.
But for investors who want the cash flow without casino's
real-estate risk and their potentially crushing debt, there's an
alternative: Online gambling.
The first Internet gambling site was launched in 1995, but it
wasn't until Chris Moneymaker, an amateur online poker player,
won the 2003 World Series of Poker that the business really took
off. Today, more than 2,000 online gambling sites offer sports
betting, virtual slot machines, poker and other casino games.
Several publicly traded online casinos dominate the market,
including 888 Holdings (LON: 888), PartyGaming (LON:
PRTY) and Playtech (LON: PTEC). These companies are
listed on overseas exchanges, which presents an obstacle for
U.S. investors unaccustomed or unable to place overseas trades.
The Unlawful Gambling Enforcement Act of 2006 made online
gambling illegal in the United States. The law doesn't target
individual gamblers, it punishes banks and credit card companies
that allow transfers to online-betting accounts. This forced the
online betting companies to move overseas.
Fortunately for investors, there is Cryptologic (Nasdaq: CRYP).
The company develops software for the online-gambling market and
licenses its products to gambling operators. The company uses
what it calls a "build once, license often" growth strategy that
generates multiple revenue streams based on the wagers placed in
the licensee's online casinos.
Because Cryptologic isn't involved in the transaction side of
online gambling, its business is legal. And despite the
unfavorable online gambling climate in the U.S., the company is
developing plenty of business elsewhere.
Cryptologic sells its software to
some of the best-known names in
online gambling, including
PartyGaming, 888.com,
SportingBet.com and Betfair. Its
products include traditional card
games, video slots, table games,
jackpot games and more. The company
even offers branded slot machines
based on Marvel Comics or "Call of
Duty," the popular video game
franchise.
All told, the company has 280 games on the market that it
licenses to 24 companies. The company expects to return to
profitability in the third quarter once the effects of the
downturn are behind it. The company has a pristine balance
sheet: $28.6 million in cash and zero debt.
Cryptologic is a small company positioned for enormous growth.
Offshore gambling sites brought in about $6 billion from U.S.
gamblers in 2008. The worldwide market is worth $21 billion and
is expected to grow to $30 billion by 2012, according to H2
Gambling Capital, an industry research group.
Cryptologic wins a bigger piece of the pie each time it secures
a new client or the industry grows. Online gambling accounts for
about 6% of the gambling industry. This is forecasted to
increase to almost 9% by 2012.
Cryptologic's shares are attractive on their own merits, but
what's most promising is the prospect of more and more online
gambling bans being overturned, including in the U.S.
House Financial Services Committee Chairman Barney Frank has
submitted a bill to legalize and regulate online gambling in the
United States. The measure is gaining support, and the Obama
administration is expected to recognize the tax revenue
potential of this growing market and support the measure. H2
Gaming Capital estimates the U.S. online gambling market could
be worth $13.4 billion within five years.
The European online market is also considering loosening its
restrictions on online gambling. The market is worth $9.4
billion right now and could nearly double by 2012. Lawmakers in
France are considering whether to legalize online gambling: The
bill there has passed the national assembly and awaits a vote in
the Senate.
Liberalization of gabling restrictions are also possible in
Portugal and Italy.
Cryptologic's shares sit at about $6 a share, but were changing
hands for about $30 before online gambling was outlawed in the
U.S. They could easily regain that level if restrictions are
reversed in the U.S. and Europe and online gambling continues to
grow.
-- Brad Briggs
Staff Writer
StreetAuthority |
