Gambling Stocks - A Safe Bet
December 7th, 2007In recent weeks we have witnessed a decline in global stock markets, partly due to concerns about the sub-prime market, as well as concerns about a general economic downturn. If an economic downturn is ahead of us as generally predicted, investors may be able to find some security in gaming stocks.
During the economic downturn of 2001 to 2003, the size of the total gambling market in Europe grew from €47.0 billion to €51.5 billion according to a study by the European Union published in 2006. A similar pattern has been recorded in the United States where, between 2001 and 2003, casino gambling revenue grew from $25.7 billion to $27.0 billion according to the AGA survey of casino entertainment 2007.
Historically, gambling has been little affected by economic downturns and has even benefited from a moderate cooling of the world economy. And in terms of online gambling, an increasing pool of potential customers should be ensured by the continued growth of the internet, regardless of the economy.
Following the latest market turmoil, the Price/Earnings ratios of some of the publicly listed gaming companies were as follows:
| Company | Approx. P/E | |
| Unibet | 10 | |
| Betsson | 16 | |
| PartyGaming | 16 | |
| 888 Holdings | 11 | |
| William Hill | 11 |
Although many gaming companies continue to operate at a net loss, for many others such as bwin and Sportingbet, the future is looking bright. By making a simple comparison of P/E ratios, these stocks seem to come at a fairly cheap price.
Although a low P/E ratio does not necessarily mean that a stock is undervalued, if there are no obvious and significant obstacles as to why they cannot maintain or increase their growth, margin and profit - it would be surprising if these stocks did not withstand an economic downturn and even increase in value.
There are also a number of factors that have had a negative impact on the valuation of online gaming stocks recently. To begin with the UIGEA forced many operators to leave the United States, shutting off their primary revenue stream, and this was subsequently compounded by several European nations taking a prohibitive stance against online gaming.
In recent months we have seen the European Commission apply increasing pressure on member states to liberalise their gambling markets, and the European Court of Justice has clearly ruled against the continued existence of gambling monopolies. Today the legal landscape in Europe is looking much more promising than only six months ago.
Following the introduction of the UIGEA, the industry suffered hugely as a result of one time costs and write down of assets relating to the departure from the US market. Online gaming operators were also forced to restructure their organisations and strategy in order to comply with the new rules of the game. If these companies were not flexible before, they have certainly learnt the hard way how to adapt to an ever changing market, enabling them to emerge as stronger leaner companies that can face the challenges of the future.
Most online operators have worked hard this year to reduce costs and improve margins, with demonstrable success. Many of the leading operators have moved away from the costly rake-back offering to customers which can negatively impact margins and reallocated the budget to more conventional marketing to generate revenue at a higher margin. This in turn has given smaller operators the chance to offer rake-back as a competitive offering in lieu of high player liquidity.
In addition to this, marketing efforts have also increased. Unibet for example has retained the services of TBWA, a world leading advertising agency, and 888 has launched a £6 million branding campaign with CHI & Partners.
The introduction of the UK Gambling Act on 1st September 2007, which included relaxation of advertising laws, has also benefited online gaming companies who can now advertise not only to the UK but other international markets too.
Although it is illegal for foreign operators to advertise in many European countries, the UK is home to a multitude of international broadcasters who are governed by UK advertising laws. This gives online gaming companies the chance to advertise directly into markets where such advertising would otherwise not be permissible.
The UK is currently home to tens of European channels including Channel 3+ (Baltics, Estonia), Bloomberg TV (France, Germany, Italy, Spain), Kanal 4, Kanal 5, Kanal 9, Kanal 5 Denmark, MTV Nordic (Sweden), TV3 Sweden, TV3 Denmark, TV3 Norway, TV6 and TV8 and a host of Asian channels.
All such channels broadcasting from the UK are now free to offer gambling advertising so long as they comply with the rules of the Advertising Standards Authority.
Of course there are risks to consider as well. The competition will increase significantly if the offline gaming companies decide to go online on a big scale, particularly from the US. They have the budgets to launch major marketing campaigns and already enjoy the brand recognition to enable them to easily capture a share of the market. That being said, it is more likely that the land based gaming companies would enter the market by way of acquisition, resulting in a probable revaluation of the industry, with values climbing.
The development of Betsson’s stock prize in comparison with the General OMX index on the Stockolm Stock Exchange
There is also the issue of taxation to consider. The industry continues to face the risk, in Europe at least, of either a Union wide harmonised tax, or the prospect of paying corporate tax in individual European nations and not in the low tax jurisdictions where most currently reside. Even taking these risks into consideration however, online gaming stocks continue to appear undervalued.
All in all, the public gaming companies appear strong enough to generate healthy profit in the coming years, regardless of an economic downturn or increased competition. And with a clearly evolving legal landscape in Europe and elsewhere, and murmurs of future US liberalisation, there appear to be enough signs to convince investors that gambling stocks are indeed a safe bet.
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