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Your Money > Investing Comment Articles > All in? Or fold?
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By Richard J Hunter, Head of UK Equities, Hargreaves Lansdown
The back door application of a law which has effectively outlawed online gaming in the US has not surprisingly sent shockwaves reverberating around the UK sector in question. For PartyGaming, the news is that the share price has now fallen 65% over the last month. For 888, a 36% dip in the share price over the period is eclipsed by a 55% drop over the last six months. Click here to go to the PartyGaming share pages Click here to go to the 888 share pages The question is, where can the shares go from here? First of all, the way the US legislation has been passed does potentially leave some stones unturned, although an all out return to the status quo is unlikely. Whether the ultimate outcome is regulation rather than prohibition is for the lawyers to decide amongst themselves. There is also the question of civil liberty and free speech from the point of view of those US citizens who can now legally visit Las Vegas and gamble their inheritance if they so wish, but cannot place bets online from the privacy of their own home. Could a backlash be in the offing? For the moment, the UK online operators are looking at the worst scenario (if we are not already there) and have pretty much thrown in the towel as far as the US is concerned. For PartyGaming there will be the additional ignominy of losing its FTSE100 status, maybe even as early as next week when the demerger of GUS is completed. The obvious next strategic move for these companies would be the traditionally rich gambling mentality in Asia and also the largely untapped European market. Even in these localities, depending on the country, there are some difficult legal hoops to get through before the likes of PartyGaming and 888 can begin to replicate some of the revenue it has lost. There is also, now more than ever, the likelihood of consolidation within the sector, particularly as many of the smaller companies will find it increasingly difficult to survive. PartyGaming is relaxed in describing itself as acquisitive, and the announcement yesterday that it would be cutting its dividend was explained by the fact that it envisages many "attractive opportunities" emerging over the coming months. Click here to go to Yahoo! message board on the online gaming meltdown Are there any glimpses of hope on the horizon for the industry? Even after the recent share price fall, PartyGaming has a market capitalisation of £1.6 billion and 888 one of £349 million. For the former, the fact remains that it is a cash generative business and has arguably reverted to the stage of development it found itself in just a couple of years ago. The absolute optimists would additionally argue that now the share prices have taken such resounding hits, the loss of their US operations is actually factored into their share prices and, as such, the shares are now at realistic levels. That must assume, however, that the online gaming industry does not find similar resistance in some of the countries they will be planning to target. On the whole, perhaps things can only get better. Perhaps there will be a US backlash and perhaps the companies represent fair value at current valuations. Certainly the market consensus on both these shares points towards picking them up at these levels. However, in the meantime - and has as been proved before - these companies represent high risk investments and as such will tend to be suitable only for the most hardened of investors. Or gamblers perhaps. Richard J Hunter Head of UK Equities Hargreaves Lansdown Stockbrokers Useful links:
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