Date updated:05-05-2007
Last week, Stephen Dubner over at the Freakonomics blog, had an excellent post about Poker: Skill vs Chance. The discussion is important not only for the sake of poker players who want to justify the enormous amount of hours studying and playing the game but also because of the recent Unlawful Online Gambline Act passed in October of last year which forbade US players from participating in online gambling sites. The law specificically states, “games predominantly subject to chance" are effected, of which poker is included. The Freakonomics post is worth reading but one point that I had not heard before was "Is it possible to intentionally lose a poker game?" If the answer is "yes" then, oddly, its more likely poker is a game of skill.
Meanwhile, if poker is a game of skill and can somehow avoid falling under the Online Gambling Act of last year then several stocks will be enormously effected. Helping matters along, Rep. Barney Frank recently introduced a law to Congress which would allow Americans to gamble online again, calling internet gambling a "victimless crime". We set up the Freakonomics Poker Stocks portfolio at Stockpickr which contains the 5 stocks that would be most effected on the long side, as well as 3 stocks on the short side that might get hurt if poker sites were legal again for US players.

-
CRYP
Cryptologic Limit - $3.54
- -0.28%
- $3.51
Cryptologic would benefit considerably if US players could play on poker sites. CRYP makes the software that fuels many of the online poker sites out there. CRYP has an excellent balance sheet to handle any slowdown with $126mm cash in the bank and no debt. With a market cap of $410mm, that leaves it with an enterprise value of just $283mm. The company had cash flows of $40mm over the past 12 months, giving it a multiple of enterprise value over cash flows of just 7, making it an excellent takeover target at these levels if one thinks the legislation will be repealed. Even without a repeal, analysts from ThinkEquity expect the company to earn $1.30 per share on revenues of $90mm in 2007, down from their earlier estimate of $125mm revenues and $2.08 a share. A harsh blow but not a knockout punch as many had initially expected.

-
OPMR
Optimal Group - $2.87
- -4.33%
- $2.86
The stock took almost a 50% hit when the online gambling law took affect. Their Firepay subsidiary runs online poker rooms and 80% of its revenues came from US customers. OPMR has the most to gain from any repeal of the law. That said, OPMR is a good investment at these levels with or without online poker. They also run a credit card processing division which processes cards from online merchants. This division will account for over 75% of revenues this year as opposed to just 50% last year. Meanwhile, the company has an excellent balance sheet with $5.63 a share in cash (almost $170mm in net cash). Leaving it with an enterprise value of just $41mm. Analysts are still expecting earnings of 69 cents a share in 2007, giving it a forward EV/ EBITDA multiple of less than five, making it an excellent buyout target even without any laws being repealed.

-
GIGM
Gigamedia Limited - $4.09
- -0.49%
- $4.11
- 43% of GIGM's revs came from their poker portal. however, the asian based company is not as affected by the lack of US customers. - forward P/e of 18 - 300% year over year earnings growth last year

-
WPTE
Wpt Enterprises - $1.10
- 0.00%
- $N/A
- World Poker Tour - planning various online sites for poker should the law get repealed

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LACO
Lakes Entertainme - $2.62
- +2.34%
- $2.60
- owns a majority of WPTE
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