Betfair going public

By: ispeculatornew
Date posted: 09.24.2010 (5:00 am) | Write a Comment  (6 Comments)

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British company Betfair announced it would be going public in a sector I would love to invest in; sports betting. It hopes to  get a valuation of 1.5 billion british pounds. Regular readers know that I am a huge fan of Betfair and its whole business model. Just seems like the equivalent of the New York Stock Exchange for Sports betting. They do have other activities but Sports Betting is where the bulk of their activity comes from and honestly it is where the whole business makes the most sense.

Financials

In the year ending April 30th 2010, Betfair made a profit of 53 million pounds on revenues of 340.9 million pounds. The company has 150.9 million pounds in cash and no debt.The company has 3 million customers and is getting many more every day. Sounds like a success story.The stock has a had double digit growth in revenues for over a decade now with no signs of slowing down.

Why is Betfair different?

When you head into a sports gambling shop or a casino, you are betting against the house. That is good but the disadvantage is that the house takes a huge cut. You have surely read about it. When you head into a casino, there is one objective for that casino, to keep you inside, playing. They will do everything possible to keep you playing because the odds are staked so much in the house’s favor that the longer you play, the more the house ends up with the chips.

Now think about stock exchanges and how they have profited from increasing volumes. Thanks to hedge funds and high frequency trading, volumes have been rising fast which has helped exchanges make bigger and bigger profits. It’s quite simple, they charge a small fee on every trade and as volume increases, so do profits. Simple formula but it explains why stock exchanges have been so active in trying to gain more market share.

Finally, a brief look back on Ebay. The power of Ebay of course is connecting users from across the world. Ebay has been able to build a business model that increases through the work of others.

EBAY + NY STOCK EXCHANGE + CASINO = BETFAIR

The concept is simple. Betfair positioned itself as a marketplace where individuals, companies or even sports betting funds can place wagers on all kinds of different events. Because of the fact that there is no “house” involved, the quotes offered are almost always the best available which has attracted volumes. Besides, since gamblers can take either side of any trade, any “bad quote” is quickly replaced in most markets as users can arbitrage that quote with any other website. This helps ensure the best betting conditions for users on almost all markets (i.e sports or specific events & matches).

This has helped Betfair gain huge market shares in the sports gambling business. While the business is still illegal in the US, Betfair has already been able to get growth from almost everywhere else in the world.

How does Betfair make its revenues? It simply takes a small take out of every winning transaction. Simple but smart. It is similar to stock exchanges in the sense that it will benefit from increased volumes more than anything else. And while competitors will surely jump in and offer smaller fees, Betfair will be able to keep its edge because that is where the volume and liquidity can be found. Will it always be the case? Not necessarily. But I would make a big bet on Betfair’s long term future. Hopefully laws in the US change so we can all enjoy the website but also have Betfair traded on US exchanges, a win-win proposition.

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6 Comments

  1. Comment by Stephen — September 24, 2010 @ 10:49 am

    Will you let us know when it goes public?

  2. Comment by Zavi — September 24, 2010 @ 12:43 pm

    i would invest in this, but I don’t think that Betfair need to go public…. the company is making lots of money, and even more if the US legislation changes.

    do you think that US regulation about online betting will change? do you think government will take their part with taxes or lobbying against it?

    Thanks!

  3. Comment by IS — September 25, 2010 @ 9:47 am

    @Stephen- Yes I will certainly be writing more about this in the near term future

    @Zavi – I’m not certain why Betfair is going public but I think part of it is the founder wanting to cash out on his investment.

    And some signs indicate that US regulations will change but it remains very difficult to predict how soon. Personally I cannot wait?

  4. Comment by mikey mouse — October 8, 2010 @ 6:38 am

    Valuation is way to high..
    There is a lot of BS associated with BF – you must be a complete idiot to think they will continue to grow at the same rate. They got lucky because they were among first on the market..
    In 5 years I don’t think they will be as popular as you might think as competition catches up..
    As a private company they enjoyed a good run – however as a public company they will need to compete in the open market in regard to their valuation and stock.

  5. Comment by IS — October 8, 2010 @ 6:44 am

    @mikey mouse – Well, first mover is huge though… who do you see that can compete with Betfair or is gaining share on them right now?

  6. […] few months ago, we did write about Betfair, the promising peer-to-peer gambling website that has been a rising star in Europe. That post […]

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