Hot Stock: CryptoLogic
Hot Stock: CryptoLogic
by Don Sutton
Canada (May. 02, 2002 - 06:01)
Webfin.com - Regardless about how you feel about Internet gambling, it is here to stay - and the folks at CryptoLogic (CRY) (CRYP) (on Nasdaq) are giving thanks.
The Toronto-based company was once a market darling. It became successful by developing software that allowed those who couldn't fly to Las Vegas to gamble just like the Big Players.
Unfortunately, American do-gooders and a high-tech meltdown made the stock come up lemons.
The stock, which once traded in the high $60 range, collapsed in early 2000 and is trading in the $20.25 range.
The main issues surrounding the company today are not technological or financial: they are moral. In the U.S., the company's largest potential market, online gambling has been blocked while the issue grinds its way through various legislative bodies. U.S. legislators are in a conundrum about how to manage potentially harmful side-effects of CryptoLogic's software.
In mid-March, a U.S. House sub-committee approved a bill to ban online gaming. However the bill is in no way certain to get final approval before the end of the congressional term. If the process is not concluded, it will be restarted next year - leaving online gamblers and their opponents in limbo.
Fortunately, CryptoLogic has found that a more open market is awaiting in Europe. Europeans have taken a much more practical view of online gambling and are managing to regulate the industry - as well as tax it.
The European market is the main reason why Research Capital analyst Scott Preston is so bullish.
Preston has raised his rating on the company from 'Speculative Buy' to 'Buy' on Tuesday. His target price has been raised to $16.10 on Nasdaq, a 37% return. It currently trades at $13.10 on the U.S. exchange.
"The whole industry has had a tough time over the past year and I think they have done a good job to lay a pretty solid foundation for 2003 with their efforts focused mainly in Europe," Preston said.
Preston's endorsement comes despite a wonky first quarter on Tuesday, which saw CryptoLogic earn US$2.2 million compared with US$5.1 million in the same time period last year (all figures except share prices in U.S. dollars).
Revenues were $8.6 million compared with $10.8 million. Fully diluted net earnings per share were $0.16 versus US$0.34.
Preston says that will move aggressively in Europe and sees its new licenses immediately impacting the bottom line.
CryptoLogic has signed on Ritz Interactive - the interactive arm of the London's Ritz Hotel - and will offer roulette, blackjack, and punto blanco to the Ritz's exclusive online customers.
Dukes Entertainment will be offering a full slate of CryptoLogic's casino games and are scheduled for launch in the second quarter. Dukes is incorporated in Curaco, Netherlands in the Dutch Antilles.
As well, Sports.com, which operates and is regulated in the U.K. is also going live with CryptoLogic's casino games. Sports.com has the highest traffic for sports information and betting in the world.
"When I look at the stock, my evaluation is derived based solely on Europe and the growth there," said Preston.
"I think the company has done a great job of signing up licensees in Europe and solidifying its position there, which I think will bear fruit by the end of this year and into next."
CryptoLogic has provided guidance, saying it should earn $44 to $46 million for fiscal 2002 and that by the end of the year, international business will account for 50 per cent of revenues.
The company has not been without nagging problems. Its software has had trouble handling credit card transaction in the U.S. As well, it has said a pending lawsuit filed by Las Vegas From Home.com, a former licensee, is without merit. Cryptologic intends to 'vigorous defend itself' as they saying goes.
But the company has a number of thing going for it. It has a strong balance sheet with $14 million in cash. As well, while the company waits to see if the U.S. will succumb to temptation or online temperance, there is always the Asian market to pursue.
Preston says he thinks online gambling will eventually be legislated in the U.S.
"I can't see how they can put the gaming industry at risk. You have already seen companies moving offshore, MGM being one, because they are not going to miss out on this opportunity. All that's going to happen is that jobs and tax dollars are going to move out of the U.S."
"I think there are going to say, 'hey, prohibition didn't work, let's regulate this and make it safe for everyone.'"