International sweet spots
CryptoLogic hits many of the sweet spots that often correlate with exceptional investment returns. To begin with, CryptoLogic is a small-cap software company -- in fact, it's a formal recommendation in our Motley Fool Hidden Gems small-cap investing newsletter. Few other industries can match the economics of the software business, which features minimal operating costs and superior cash-generating abilities. Of course, that doesn't mean we should go out and buy every software stock in sight, but it's not a bad place to start.
CryptoLogic regularly sports operating and free cash flow margins of approximately 20% and 30%, respectively. Add CryptoLogic's small-cap size of $300 million -- allowing plenty of room for growth -- and you've got a solid foundation on which to build some booming returns. After all, dynamite does come in small-cap packages.
It takes 10 years to build a reputation .
Of course, CryptoLogic is far from your typical software developer. Over the years, the company's Internet casino software has received numerous accolades from the likes of Gambling Online and Casino Player magazines. Most recently, CryptoLogic was named the iGaming Software Provider of the Year at this year's UK Gambling Awards. In fact, the company's big advantage when attracting and retaining blue-chip licensees such as William Hill, Playboy, and the most recently signed Betsafe, is its solid reputation -- CryptoLogic has the rare distinction of being certified in many highly regulated nations. In a fragmented industry where able companies such as Taipei's GigaMedia
In other words, CryptoLogic provides one of the most trusted Internet gambling infrastructures available in a thriving international industry.
A wide world of wagerers
According to Global Betting and Gaming Consultants, the Internet gaming market is expected to grow from $12 billion in 2006 to $19.6 billion in 2010. To be fair, the new U.S. law banning Internet gambling will surely put a dent in those estimates, and only time will tell just how big the damage is. Either way, the data clearly shows that a worldwide demand to gamble online exists and that CryptoLogic will play a major role in meeting it -- with or without the United States.
Priced into the pot? Not.
That brings us to the most compelling argument for CryptoLogic: its price. As I mentioned earlier, CryptoLogic has a market cap of about $300 million. But I didn't mention that $129.2 million of that amount, or $9.37 per share, is made up entirely of cash. With zero debt on its balance sheet, CryptoLogic currently trades at an EV/EBITDA multiple of just above 4 -- in other words, it's dirt cheap. Now, the market might, in fact, be correctly discounting CryptoLogic's loss of U.S. revenues, but there are three main reasons why the price looks more like the result of an overreaction, rather than a fair valuation.
First, virtually all of CryptoLogic's revenues are of a recurring nature. With the recent signing of two major licensees -- Playboy and Betsafe -- the company's short-term earnings should hold up relatively well.
Second, CryptoLogic's long-term outlook is even better. With Europe and Asia alone having considerably more than 10 times the population of the U.S., there should be more than enough growth in demand to make up for the shortfall of U.S. business.
And finally, there's a good chance that the newly formed Democratic Senate will support a campaign that looks into the regulation of Internet gambling, rather than its outright prohibition. That makes CryptoLogic's stock a truly mouthwatering risk-reward proposition for 2007.
Bet on the best
So, my Foolish voters, can we agree that CryptoLogic's size, fundamentals, global potential, and timely circumstances give it the nod for 2007's best international stock? If so, head over to our brand-new Motley Fool CAPS community intelligence database and rate CryptoLogic an outperformer. If not, then rate it as an underperformer. Based on your votes, we'll declare the best international investment of 2007 early next week. Place your bets, Fools! Click here to sign up for the free service.
Go here for the complete list of contenders in our CAPS international-stock tournament.