The E-Gaming Industry Is Set For A Major Leg Up

The terms e-gaming and online gaming are often used interchangeably in place of the phrase online gambling to demonstrate the internet aspect of the service.  Either way from the launch of the first remote /e-based online gaming site in the mid-'90s the industry has gone through a number of transformations and is now considered a serious option for investors both short and long term, albeit one with an uncertain horizon and future challenges.

How the market has shaped up

The market has grown over the years and now it involves players including giants such as Betfair, 888 Holdings, GVC Holdings, Bwin.Party as well as smaller start-ups like GigaMedia and Sky-Mobi, among others. The online gaming industry is seen as covering 5 distinct verticals: online casino, online poker, sports betting, online bingo and social gaming.

Early this year, I wrote an article discussing how companies like William Hill could leverage the impact of new taxation laws by prioritizing their online platforms over their bricks and mortar operations.  This illustrated how cost-effective it is to run an online gambling site compared to bricks and mortar machines shop.

Since the emergence of e-gaming companies in the mid-late 1990s, several of these online gambling companies have gone public including 888 Holdings, which was established in 1997 and listed at the London Stock Exchange in 2005, as well as Bwin.Party, which is one of the leading players in the industry.

Stock price performances and industry status

There have been mixed results for the publicly listed e-gaming companies reflecting the markets' perceptions of how the companies have faced up to the two distinct challenges to the sector, that of the closure of the U.S market and the decline in the online poker vertical.

For example, 888’s company’s market value has increased by about 33% since going public 11 years ago, whilst Bwin.Party’s stock price has declined from about GBX 211 in 2011 to about GBX 127 on January 22^nd this year.

Consolidations in the industry have also increased over the past few years due to tightening regulation and taxation policies. For instance, Irish-based Paddy Power and UK’s Betfair merged to form the largest e-gaming company Paddy Power Betfair last years and are now listed as one at the London Stocks Exchange.

Bwin.Party in itself became the latest subject of acquisition in the online gambling industry after Isle of Man-based GVC Holdings bought it for about $1.7 billion in February this year. This goes to show the increasing consolidations in the industry as players struggle to keep up with the challenges of increasing regulation as previously gray markets (legally ambiguous)  become white i.e. fully regulated with all that entails.

Still, mixed results in the stock market and industry consolidation hasn’t put off other companies (some at medium size market cap) from aspiring to list in the market with the likes of Betway Gaming likely to pursue public funding via an IPO in a bid to boost its cash flow.

Meanwhile, the US still generally remains resistant to e-gaming with only Nevada and New Jersey the only recognized states to allow companies to transact business in online gambling. However, some others states are beginning to loosen their stance on e-gaming with some U.S bricks and mortar casino operations beginning to partner and get ready with European-based online gambling companies for when legalization occurs. Still, U.S Industry watchers caution about the prospects in the U.S, believing that any legalization will only occur in the less lucrative poker vertical.

Going forward

The important thing to note about online gaming is that due to the varying regulatory frameworks in different countries and the fact that the service is 100% online-based, some investors find it easy to set up new start-ups. However, sustaining growth has proved more difficult for those who launch their businesses.

As such, even the currently traded e-gaming stocks are facing a serious challenge of keeping shareholders happy. For instance, shares of GVC Holdings are already down 7% in the last two weeks but still remain attractive after rallying 35% since late January this year.

On the other hand, shares of 888 Holdings are up 30% while Paddy Power Betfair is down 13% since it started trading as a joint company in February this year following last year’s merger. Another mega-merger between Ladbrokes and Coral was announced last year and this saw shares of Ladbrokes rally by 18% over a period of 10 days. The deal is scheduled to close sometime this week.

Ideally, the increasing number of mergers between the large players will leave the industry with a few mega players and several small players and start-ups. The mergers between the large players also suggest that the companies will be able to generate more cash to finance compelling investment opportunities. On the other hand, the others that remain independent may seek to raise more capital via a public offering.

For instance, I mentioned Betway as one of those that could easily offer their stock to the public via an IPO. Another company that may seek this avenue would be Net Entertainment, which is currently listed in Sweden.

Unlike the likes of Paddy Power, 888 Holdings, and GVC Holdings, Net Ent operates in a slightly different market in the e-gaming industry. The company is mainly focused on social gaming and online poker whereas 888 Holdings and counterparts receive high traffic from sport betting activities. William Hill, on the other hand, is very successful in running casinos.

All these market verticals are facing different futures with casinos and sports betting sites looking positive while poker and social gaming sites appear to have stalled in the recent past.