03 March 2006

Betfair: Focus on horse racing versus a 60:1 P/E?!

I'm pretty sure betfair has indicated this publicly - its primary profits on the exchange side are driven by horse racing. Two moves acknowledge this strategy. Most recently betfair has been courting a betting license in South Africa. Unknown to me, "...betting in SA was entirely focused on horse-racing, which was not found elsewhere in the world.". This news comes on the heels of betfair's newly started operations in Australia, another country with a long heritage of gambling on horse racing.

So the current state of play is that betfair is in two major horse-racing-with-gambling markets (UK, Australia), and is courting a third (South Africa). According to the website, horse racing is covered in Australia, France, Russia, UK, and the USA. The only major horse racing markets missing here are South Africa and Hong Kong (and maybe New Zealand). This gives them some room to grow both with existing and new markets. The UK horse racing market, for betting exchanges, is probably maxed out.

In addition to racing, betfair has established a very good poker room, no doubt contributing significantly to their revenue. However, betfair is currently dependent on Crypto for their poker room (ranked at #5 per pokerpulse*), and will soon take a big step backwards by moving off Crypto and on to their own poker site (Pokerchamps/Aglet, not listed in top 10 on pokerpulse), substantially decreasing their market size. For those that haven't read Into the Tornado and other books that highlight the need to be #1 or #2 when market growth flattens, being way down the market size list isn't a good thing. How long the UK market has in poker is anyone's guess - mine is maybe another year at most before things flatten out. Consolidation, a precursor of market flattening, is already well underway.

Now lets look at the P/E of a few publicly traded gambling companies (data from digitallook.com, 2006-03-03)?

  • Sportingbet: currently at 21.6, forecast at 18.5
  • Party Gaming: currently 28.6, forecast at 13.8
  • Betonsports: currently at 21.8, forecast at 14.9
  • 888 (Cassava): 18.9 (Dec 05 forecast)

Now, to put this together, lets examine the recent announcement by betfair that Japan's Softbank will be buying up to 23% of the company for GBP 1.5B, or about GBP 13/share. If we consider betfair's earnings report issued in June 2005 for 2004, opearting profit (pre exceptional items) was GBP 22.3M. That would be very roughly a P/E of... wait for it... 67! Even playing the speculative game of "guess betfair's operating profit for 2005", and maybe double their growth, that is still a P/E of at least 30.

I believe betfair has already crested in horse racing exchange turnover for the UK, and is riding the poker wave, and will experience some growth in outside-the-UK racing markets. I believe betfair will also continue with facilitating global price flattening on sports betting (in fact, I'd say they need to emphasize this more, and be less about "nah nah in your face you bad UK sportsbooks", which they've already toned down a lot). I don't believe that betfair has a future as a brand/product for mainstream punters, and would do better to co-opt betdaq's period strategy (as later co-opted by betdaq partner betandwin) to be a bookie behind-the-scenes trading platform that skilled punters themselves can go directly use if they're up to it.

All of this begs the question of "what do betfair strategists and SoftBank know that us yokels don't". On the surface, the price paid by SB is nuts. Clearly these guys aren't dumb, nor is betfair, so there must be something to it. Can remaining poker growth, remaining racing markets, and b2b activities warrent such a forecast? SB would want at least, what, a 4x increase on their speculative investment, so SB must think so. Given all this growth, can people imagine betfair, with the businesses outlined here, as a GBP 6B company? I'm struggling a little.

*Pokerpulse not a definitive authority and their data looks a little wonky to me, so take it for what its worth. I would consider Alexa an even worse measure.

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