Off to the Races

09/24/2004 12:00 am EST

Focus:

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

"It’s off to the races with YouBet.coma gamble on good, old-fashioned horse-track betting," says Ian Wyatt, editor of Growth Report, who is known for finding intriguing and lesser known opportunities in companies within the online arena. Here’s his latest.

"YouBet.com (UBET NASDAQ) is the leading online provider of betting and handicapping services for the horse racing industry. Off track betting is legal in all but 14 states. In 2003, total dollars wagered off track had grown to $13.3 billion. The market in the US is significant, and YouBet is the clear leader. YouBet provides a service to players allowing them to make deposits to YouBet.com, which are then available for placing bets on a variety of races held in the US and abroad. YouBet has agreements in place with most of the major track owners and operators in the US that allows the company to take bets and provide video feeds of the races to customers over the Internet.

"We believe there are a number of opportunities that lie ahead for YouBet that could propel the growth of this already healthy business in the coming years. In late July, the company announced that Victor Gallo, the company's general counsel, would become responsible for developing new business opportunities in Las Vegas. Outside of Nevada, we believe there is the opportunity for YouBet to acquire smaller competitors in order to attain a larger customer base that would add more leverage to the company's business model. As a publicly traded company, we believe YouBet is in an ideal position to make acquisitions using cash, stock, or a combination of the two. Internationally, there are numerous off-shore casino companies that provide card games such as blackjack and poker, yet do not provide wagering services. We believe there exists a significant opportunity for YouBet to offer its software and solutions to these other companies looking to enter the horse wagering space through an existing solution. We believe YouBet, with its tier one wagering solution, is in an excellent position to expand into this space.

"YouBet.com's current management team came into control of the company in 2002 and has been aggressively working to turn the company around since. They led YouBet from the verge of bankruptcy to its first profitable quarter during the first quarter of 2004 and were responsible for growing total revenues from $6.3 in 2001 to $25.9 million in 2002, and more than doubling to $53.1 million in 2003. YouBet is off to a strong start in 2004, reporting solid first and second quarter results. First quarter gross handle increase 18% to $72 million, resulting in net revenue of $5.4 million, a 43% increase. As of June 30, YouBet had cash and cash equivalents totaling $11.4 million, and no debt. YouBet's business model has 90% of total costs fixed and is currently running at only 25% capacity. We believe this translates into a highly leveraged business model that could allow YouBet to significantly grow net income and EPS on incremental revenues.

"YouBet shares have been negatively impacted by the overhang of stock held by GemStar, which owns five million shares, which were registered on June 10 and are now free trading. We believe investors have been selling shares of YouBet on concerns the GemStar will dump these shares on the market. As a result, YouBet plunged from over $6 in April. Meanwhile, the latest institutional ownership records (dated June 30) show JP Morgan Investment Management buying 576,000 shares to bring its total holdings to 5.9 million shares, or 6.6% of the shares outstanding. Other buyers include Numeric Investors, which bought 1.1 million shares or 3.8% of the shares outstanding, and Alkeon Capital Management, which bought 714,000 shares. It is also nice to see these and a number of smaller institutions picking up shares at around the $3 level. We believe the shares are oversold. News of the company's success in Nevada, expansion into international markets, or consolidation within the industry could provide significant upside. We believe price appreciation to the $4 level is realistic, with longer term upside possible based on positive developments."

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