My
friend Mark set a great scene.
He busted
out of his monthly poker game early and was sitting around with the
other losers watching the big game of the night on television.
It was not
the Red Sox.
It was the
World Poker Tour, a series of televised tournaments on The Travel
Channel.
The
conversation turned to Texas Holdem poker's current
popularity, and how somebody is making a fortune on the craze.
And then,
Mark told me, one of the guys says: " 'You can get in on this –
World Poker Tour went public about a year ago.' By the end of the
night, I was thinking it sounded like a pretty good idea."
If you
play Texas Holdem
poker -- or
just read this column regularly -- you can probably spot the tell
here, so you're not surprised that WPT Enterprises (ticker WPTE),
the producer of the World Poker Tour, is today's pick as Stupid
Investment of the Week.
Before the
hate mail starts from poker fans, understand that I love the game
and play it myself (the math of it appeals to me). I just don't want
to bet on it, least of all with a company that isn't quite profiting
from poker in the way Mark and his buddies think.
WPT
Enterprises is in the television production business, making the
shows and merchandising its brand from there. It is getting more
involved in direct gambling, thanks to a new venture that actually
casts a pall over the stock in my opinion, but for now, it's still
mostly a filmmaker.
In many
ways, WPT reminds analysts of World Wrestling Entertainment (ticker
WWE), the company behind Vince McMahon's popular professional
wrestling organization, which went public a few years back to a lot
of fanfare. Ordinary investors thought they were buying into the
popularity of wrestling, but what they got was a television
production business. Since the buzz faded, WWE has mostly been
beaten up in the market arena.
It's far
too simple to assume WPT Enterprises will share that kind of fate,
but it's hard to ignore that potential.
To this
point, WPT has been like a pair of aces, strong enough to make
investors want to double up their bet.
Since going
public last year, the stock has nearly quadrupled. It has
nearly doubled since late January, and it had a nice pop
last month when poker legend Doyle Brunson led a group that
reportedly made a $700 million cash bid for the stock. The
bid turned out to be a complete bluff; WPT management
couldn't get Brunson's group to reveal its hole cards, and
the deal was folded away in days.
Even after fallback from that, there's no denying that WPT
has been good to its early investors.
It's the current numbers that look a bit troublesome for
someone just ready to ante up.
The stock now sells for about 15 times book value and 25
times sales, rich numbers for an upstart. The few analysts
who follow the stock rate it as a buy, but they also project
earnings to grow by 50 percent a year for the next five
years, which seems to be overplaying the cards that already
have been dealt.
It
certainly is hard to forecast that kind of sustained growth
for the company when there is plenty of competition out
there, both from the television side of the business and the
gaming side. It seems like everyone is trying to make money
on the poker craze, including the established gaming
companies and all types of new entrants to the field.
But for an investor looking to cash in, getting close to the
action theoretically should mean investing with a firm that
profits from gaming, not television.
"I'd prefer someone who benefits directly from people
spending money directly on poker, as opposed to the number
of eyeballs on the screen," says hedge fund manager Mark
Sellers of Sellers Capital in Chicago.
In
fact, the success of the World Poker Tour has helped build
some of WPT's competitors, as they have drawn online gaming
customers while advertising on World Poker Tour broadcasts.
WPT has now entered that arena through WPTonline.com, an
Internet gambling site that prohibits bets from players in
the United States and other jurisdictions where online
gaming is prohibited.
That
new venture poses new risks.
Deloitte & Touche, WPT's auditor, resigned
after noting that the online venture created audit
risks that would require an inordinate investment in
time and resources, relative to the company's size
as a client. Because the site must abide by U.S.
laws, WPT's auditors must make sure it hasn't taken
bets from Americans.
In a cash-driven business where a lot can be
concealed in bank-routing numbers, that's a tall
order.
It puts WPT in a danger zone that average
investors probably want to avoid.
While poker's wild popularity may turn out to
be more than a fad, there's little doubt that some
of the businesses built to support the current mania
are going to wash out.
WPT may not be one of them, but there's little
doubt that this is a hand most investors would be
better served to fold than play Texas Holdem. |
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