Damp Squib

Plenty of comments about the Betfair results and continuing share price slump, but I thought this one from the Guardian was one of the best.

It turns out that the really duff float of the year from Goldman Sachs wasn't Ocado (shares down 11%) but Betfair, which stands 24% behind the starting line after today's weak first-half update. In terms of trading results, Ocado has at least produced what was expected of it –the scepticism relates instead to the valuation of a loss-making business. By contrast, investors in Betfair have a disappointing number to point at – growth of just 1.6% in the core betting exchange in the second-quarter of the financial year.

Some high-rolling poker players have disappeared; horse-racing is declining in popularity; and gamblers are risking less when budgets are tight. These are minor complaints: it's just that there is a lot of them.

The risks were covered in the prospectus, of course, but suddenly Betfair doesn't look like the reliable, all-conquering powerhouse its fans thought it was. It looks vulnerable to the ebbs and flows that affect all gambling stocks. And it looks as if the shares, £13 at flotation, were priced for perfection.

At 990p, Betfair is obviously a more enticing prospect. Today's trading numbers were a setback but not a disaster: the core British business is well established and should still churn out decent sums of cash. But there is little clarity on the adventures into new territories – the US and financial markets – that were the other factor behind the princely float valuation.

California will allow exchange wagering on horse-racing from May 2012. Fine, but let's see how the conservative, and powerful, American horse-racing lobby reacts. It is also far too early to say how the LMAX financial exchange will prosper – it's only been open for a few months.

Until the picture becomes less fuzzy, putting a fair value on Betfair is an exercise in educated guesswork. There is room for honest disagreement.

From the point of view of Goldman and Morgan Stanley, the sponsors to the float, the concern will be the behaviour of the insiders, Betfair's long-standing investors who still dominate the register. The first lock-up agreements come off next autumn. If the shares still stand well below £13 then, it would be embarrassing for the investment banks if there's a rush to sell.

Gambling Online reported that

The latest set of financial results published by Betfair PLC today has revealed that the site’s poker revenue has plummeted since their switch to the Ongame network.

The results for the six months from May to October 2010 saw a decline in earnings from both poker and horse-racing, and although a full breakdown of figures has not been forthcoming, the company did release a statement describing the size of its fall.

“Games growth has strengthened but poker has continued to show significant year-on-year declines following its migration to the Ongame network,” the statement read. “In the second half we will continue to improve our customer offering and address challenges in poker with a number of product enhancements and initiatives”.

However, it should be noted that the company’s overall growth has still risen – albeit not by the margin that they would have liked – by 27 percent to $213.3 million in the same period, with the rise being largely the product of some “robust performances in football, other sports and skill games” across the entire Betfair network.

No surprise that horse racing is declining in popularity. This isn't the 1960s. There are far more interesting sports to invest on these days! "Robust performances in football". Well, hardly surprising with a World Cup just behind us, but the future for Betfair shareholders doesn't look too green in my opinion. After the years long build up to flotation, it's really been a damp squib.