TEXAS HOLDEM ONLINE POKER

Here's a tip for you market gamblers out there: Ante up on poker stocks.

Analysts are bullish on makers of online gambling software -- led by Toronto-based CryptoLogic Inc. -- largely because of the booming online poker industry.

A month ago, CryptoLogic beat analysts' expectations for the third quarter with earnings of US$2.9-million, up 32% year over year. The company said it made more than 15% of earnings from its poker business, up 55% from the previous quarter.

CryptoLogic, which runs the fourth biggest network of online Texas Holdem poker sites in the world, says more than 3,000 players can be found on the company's networks at any given time.

"Online poker is the fastest-growing segment in the history of interactive gambling, and Cryptologic has a great seat at the winning table," said Lewis Rose, the company's president and chief executive, during a conference call after earnings were reported.

Investors, too, are excited about poker stocks. CryptoLogic shares (CRV/TSX) are up 76% to $27.40 since January, and 52% since it reported third-quarter earnings.

Meanwhile, Toronto-based CES Software PLC (FUN/TSX) is up 28% to $3.86 year-to-date with Calgary-based Chartwell Technology Inc. (CWH/TSX) up 145% to $4.90. Boss SS, an industry leader that trades on the Stockholm exchange, is down slightly on the year but up 23% since August.

Driving online poker growth is the recent success of televised poker matches, such as "World Series of Poker," "World Poker Tour" and celebrity games.

But companies providing online Texas Holdem poker services can thank one man in particular: Chris Moneymaker, the winner of the 2003 World Series of Poker. Mr. Moneymaker (his real name), an accountant from Tennessee, is the first player to win the poker championship after qualifying at an online tournament, proving that Internet gaming can mean big money -- US$2.5-million to be exact.

Mr. Moneymaker was followed by Greg Raymer and David Williams, the winner and runner-up of the 2004 World Series of Poker. Both players qualified at PokerStars.com.

The success of Mr. Moneymaker and his peers has translated into tremendous growth for the online poker industry. Texas Holdem Poker Web sites are expecting revenue of US$1.5-billion this year, compared to just US$100-million two years ago. In total, more than US$30-billion in bets will be laid in 2004.

Most analysts agree there is still room to grow. In November, Greg Harris, an analyst with Canaccord Capital, raised his fiscal 2004 revenue estimate for Cryptologic to US$62.3-million, from US$60.2-million, and earnings per share estimate to US94 cents, from US85 cents, based on growth of the company's poker business.

Analysts are calling for 38% growth in CryptoLogic's poker revenue for 2004, but Mr. Harris thinks it could be even higher. He upgraded his estimated poker revenue to US$12.7-million for fiscal 2004, up from his earlier estimate of US$10.5-million, and US$21-million for fiscal 2005 (previously US$16.4-million).

Robert Winslow, an analyst with Harris Partners, initiated coverage on CES last week with a $4.00 target price and "buy" recommendation. He said depending on successful merger and acquisition execution, CES could offer returns of 300% to 500% over the medium term.