Will Poker Stocks Fold?

Suddenly, poker isn't as hot as we thought it was. Or is it? Early this morning here in the U.S., London-based PartyGaming (LSE: PRTY  ) announced that it expected slower growth rates from its online poker business in future quarters, according to Bloomberg. (You can download a PDF of the press release here.) The company, which trades on the London stock exchange, promptly lost more than $4 billion of its market value.

Is this really the end for poker? Hardly. PartyGaming simply said growth rates would slow. That happens to every business, especially as its market expands. In the case of online poker, the market has grown exponentially -- from $90 million in 2002 to $1 billion in 2004, according to Christensen Capital Advisors. Part of the reason is the onset of competition from WPT Enterprises (Nasdaq: WPTE  ) and Sportingbet (LSE: SBT  ) , which runs the Paradise Poker website.

What's more troubling, to me at least, is that PartyGaming gave an excuse for slowing growth when it didn't need any. According to Bloomberg, CEO Richard Segal said the late airing of the World Series of Poker (WSOP) on ESPN could have hurt results. (The schedule of events began on July 19 in the U.S. and on Aug. 23 in the U.K. It began on July 6 last year.) This is a weak explanation, at best. Research from PokerPulse -- which PartyGaming ironically mentioned in its earnings release -- shows that the site handles more than 40% of online tournaments. With more than 5,000 entrants in this year's $10,000 buy-in No Limit Hold'em event, the vast majority of whom came from online qualifying tournaments, I find it hard to believe that this year's WSOP did anything but help PartyGaming's results.

The simple truth is that poker's a bigger industry now, and that makes comparisons tougher. Frankly, that's good. Poker stocks' valuations have been built on quite a bit of hype. PartyGaming's declining growth rates have proven that -- pardon the pun -- the party can't go on forever. If investors overreact, that could lead to a wicked hangover for some current shareholders.

Just remember that PartyGaming booked $171 million in net profit on $473 million in revenue for the first six months of the year. That's an astounding 36% net profit margin. A company like that doesn't need hype. That's why I'm hoping today's action might trim down valuations on stocks within the online poker sphere. If it does, some very good stocks may soon trade at a healthy discount to their real value.

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Fool contributor Tim Beyers checks and folds when it comes to poker stocks. If only he were so careful at the tables. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.


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