With trepidation: an Internet stock
You're probably asking yourself whether there's some way to profit from this wonderful turn of events besides being lifted by the tide with everyone else. But we're in very much the same situation as somebody a hundred years ago who could clearly see that the automobile was going to change the face of the planet. Which of the hundreds of automotive entrepreneurs should you invest in'! Since 99% of them eventually went bust, it would have been easy to be right on the trend, but wrong on the vehicle to ride it. In a decade, perhaps, we'll see a plethora of nanotechnology stocks repeating the problem. although I hope to be among the first in when that eventuality unfolds. In any event, this problem is one reason why so few investors are successful.
The present problem, as I tried to emphasize earlier, is that it may still be early for the Internet itself, but it's very late for investing in the stocks, at least in this cycle. But who can tell how high this tree can grow'? Perhaps in the final analysis Peter Lynch was right when he said, "Anyone who spends more than 15 minutes a year trying to figure the direction of the stock market, interest rates, or the economy, is wasting 13 minutes."
As those of you who read my third book, Strategic Investing, (Simon & Schuster, 1982, $ 10 postpaid from Assets Mgt, Box 5195, Helena, MT 59604. 1 believe You'll find it a worthwhile read.) know, I've long been a fan of gambling stocks for reasons explained there, and which are still valid.
Over the last seven months, since I first recommended Starnet (SNMM:BB, US$4) to fax alert (call 406-443-0741) subscribers at US$ 1, I've bought a meaningful position in it. It was a fundamentally more risky stock then than it is now, however. Those of you who monitor the Quarterly Open Positions will have noted it joined the list there in the August issue at $0.47. Here's why. And why, notwithstanding the caveats, it is still an excellent buy today.
Starnet: the business
Compared to the mania in other areas of the Internet, the prices of Internet gambling stocks have gone nowhere, even though their business is growing at the rate of the rest of the net. And they're actually making money. Now.
In order to gamble on the Internet a player dials up a web page, uses his credit card to establish an account, and then downloads the appropriate software. He can then take his choice of a myriad of games: international lotteries and sweepstakes, sports bookmaking, horse racing, slots, blackjack, and everything else people bet on either in person or over the phone. To my way of thinking, the future of this business can be expressed in the form of a syllogism: People like to gamble. Soon almost everybody will be on the Net. Therefore, gambling on the Net will be big business.
There are about ten publicly-traded Internet gambling stocks; all have micro-sized market caps on the order of Starnet's $ 100 million. Most prominent among them are GIC Global Intertainment Corporation (GGNC:BB, $2.36), Global Games Corporation (GLOW:BB, $0.28), GLC Limited (NASDAQ:GLCCF, $11.75), Atlantic International Entertainment Ltd. (AIEE:BB, $2.37) and Cryptologic Inc. (CRY.T, C$14.50). I think they're all of interest, but I haven't spent the time digging into them. Starnet appears to have the largest market share of any public Internet gambling company I'm aware of, has recently turned the comer into profitability, and I know its management. So it's my preferred choice.
The risks
The big perceived risk with Starnet, and every other company in this business, is punitive regulation, taxation, or legal attack by various governments, especially the U.S. federal and state governments. This is probably the major reason why these stocks haven't yet gained wide popularity. My own view is that while various levels of government will continue to be a nuisance, there's a good chance the courts will keep the Net relatively free of interference on First Amendment grounds. Fortunately, however, we don't have to rely on the courts, which are about as predictable as a roulette wheel. That's because it's simply not technically feasible for governments to preclude any given activity on the Net, try as they might. It's hard to keep anyone with a computer and a telephone from getting on the Net, whether the Authorities like it, or not. The reality of the situation makes me feel fairly confident about the long term viability of gambling on the Net.
The really big risk today, however, is not just taxation, regulation, and harassment, but "money laundering." The government's preferred line of attack for almost any real or imagined financial violation today is its numerous and draconian "money laundering" statutes, and casinos are an ideal way to launder money. By betting on, say, red or black in roulette, it's possible to "win" a lot of money, showing a legitimate source for it. Or "lose" a lot of money here, with winnings deposited in an offshore bank. Traditional casinos in the United States are now very cautious about possible sources of their client's money, a far cry from the way it used to be. Among other things, an institution accused of being a laundromat, perhaps even unwittingly, can be fined twice the amount it's accused of laundering. This is probably the main reason the established casino and established computer companies aren't involved in the area; it's almost impossible to know your customer over the Net. It's certainly not the lack of potential profitability that's keeping them out.
The field, therefore, is populated by small companies that are willing to take risks. But major brokers and funds are loathe to get involved with small companies that are taking risks by dealing in an area the government looks at askance. This may change if the rewards are rich enough, of course. When I visited Starnet's offices for the second time a few weeks ago Mark Dohlen, their president (a very impressive guy who looks like actor Steven Segal), told me that two name brokers are talking to them about raising some serious money in a secondary. We'll see.
A parenthetical comment. When Americans gamble on the Internet today, most will find it convenient to open an offshore back account for debit/credit of their losses/winnings. Eventually that will amount to millions of people. It's going to be a new experience for almost all of them, with lots of interesting ramifications.
The risks are real. But my feeling is that Internet gambling is going to evolve vastly, indeed exponentially, more rapidly than conventional gambling ever did or could have. In sports betting alone, Americans will wager about $600 billion this year - $500 billion legally, and $ 100 billion illegally. Internet betting is still a rounding error compared to conventional gambling, amounting to only $1 billion. But that's up from $60 million in 1996, $600 million in 1998, and it will be an estimated $5 billion in 2001. 1 think it will be bigger than conventional gambling in 10 years.
But what is the catalyst that will ignite these stocks, and reward current investors? I think it has to be such rapidly expanding profitability that investors' attention is forced to look in their direction. And Starnet impresses me as a company that could take off.
