by Alan Woinski
Ever since the October crash of 1987, a psychological fear factor has been apparent, causing wild volatility in the financial markets each year, during the month of October. Hence, October’s reputation as the "cruel month."
So, as we head into the cruel month of October, it may be time to revisit an earlier topic from this column—Internet gaming stocks.
Despite the threat of the Kyl Bill, and despite the recommendation of the National Gambling Impact Study Commission to make Internet gaming illegal, gaming in cyberspace continues to grab headlines and grow each and every day. That growth isn’t necessarily caused by a more people gambling on the Internet. It’s caused by an increasing number of companies "changing" their corporate focus to Internet gaming.
Back in 1992, the gaming stocks were much like the Internet stocks of 1998 and the first half of 1999. If you had "casino" or "gaming" as part of your company name, you were insured that your stock would rise. The perception in 1992 was that, within a few years, there would be a riverboat casino in every puddle across the country and a video lottery or a slot machine in every retail outlet. Wall Street felt that it was easy to make money in these operations. Just put a few slot machines somewhere and you could make a fortune. Like with the Internet stocks of late, when Wall Street realized that their perception was wrong, they murdered the prices of the gaming stocks.
The supersonic rise of gaming stocks in 1992 caught the eye of many fledgling companies. Pasta companies, cable companies and mining companies converted to gaming companies overnight, and Wall Street didn’t care that they had no operations, no experience and no money to enter the industry. Never before did worthless swamp land in Mississippi, land which could never be developed into a casino, get such a high valuation from the herd on Wall Street.
Jump back to early 1999 and you are seeing the same thing happen in the Internet gaming industry. The meteoric rise in the stock price of Starnet Communications ($0.59 to $27) in just a few short months, the appetite of Wall Street for anything with a "dotcom" or "Internet" in its name, coupled with the mainstream casino index being one of the top performers in the 1st quarter of 1999, has once again piqued the interest of many a fledgling company. We have seen mining companies, flight simulator companies and food companies turn into Internet gaming dotcoms overnight. In fact, it appears that as of August, there are now more companies who say their business model has something to do with Internet gaming than companies who are involved in the mainstream casino business. Spurring all this on is the interest of mainstream casino companies—such as American Wagering, Park Place Entertainment, IGT, Innovative Gaming and Harrah’s—in either starting up or investing in Internet gaming.
The interest of mainstream companies just about closes the door on the chances of the majority of these converts to ever make money in this industry. There are just too many companies now saying they are going to be the "Harrah’s of Internet gaming." There will be many success stories, such as Starnet, Atlantic Int’l Entertainment Ltd., Virtual Gaming Enterprises and others, but the failures will probably outnumber the success stories by about 5 to 1.
While the results of the casino craze of 1992 backs up those bold statements, it should also be noted that there was a very different situation in the mainstream casino craze of 1992 and this current Internet gaming frenzy.
The casino craze of 1992 was caused by new areas considering and actually legalizing gambling in one form or the other. The Internet gaming craze of 1999 is being staged amid a backdrop of political maneuvering to officially deem Internet gaming illegal. While the enforcement of any bill such as the Kyl Bill has about as much chance of success as the enforcement of the laws which said that casino gambling in California by Indian tribes was illegal, shockwaves could reverberate through Wall Street on any noise coming out of the Kyl camp. Congress went on a long vacation in early August and the Kyl Bill was no where to be found on the Senate floor. Between September and December, there could be more important issues which pop up, causing Congress to once again shelve the Kyl Bill. But it is still out there and it is still a threat.
With the exception of the established companies—the ones who will someday be considered the pioneers of this industry—investments in many of these other Internet gaming companies should be considered speculative and a gamble. As we all know, there is nothing wrong with gambling, however, this is one time when you must know when to hold ‘em and when to fold ‘em.
The hype surrounding these companies present opportunities for aggressive and smart traders, however many of these stocks are not ones to buy for the grandchildren and to hold forever. The types of companies which convert to whatever industry is hot these days are the types that do this every few years. That means that they get into a hot industry, usually late in the cycle, run up their stock, raise a bunch of money, and, when the hot industry goes cold, they revert back to waiting for the next hot group to come along and convert to that type of company. Money management and research of these companies is imperative, but most of all, remember to have fun and not to bet the farm.
Ever since the October crash of 1987, a psychological fear factor has been apparent, causing wild volatility in the financial markets each year, during the month of October. Hence, October’s reputation as the "cruel month."
So, as we head into the cruel month of October, it may be time to revisit an earlier topic from this column—Internet gaming stocks.
Despite the threat of the Kyl Bill, and despite the recommendation of the National Gambling Impact Study Commission to make Internet gaming illegal, gaming in cyberspace continues to grab headlines and grow each and every day. That growth isn’t necessarily caused by a more people gambling on the Internet. It’s caused by an increasing number of companies "changing" their corporate focus to Internet gaming.
Back in 1992, the gaming stocks were much like the Internet stocks of 1998 and the first half of 1999. If you had "casino" or "gaming" as part of your company name, you were insured that your stock would rise. The perception in 1992 was that, within a few years, there would be a riverboat casino in every puddle across the country and a video lottery or a slot machine in every retail outlet. Wall Street felt that it was easy to make money in these operations. Just put a few slot machines somewhere and you could make a fortune. Like with the Internet stocks of late, when Wall Street realized that their perception was wrong, they murdered the prices of the gaming stocks.
The supersonic rise of gaming stocks in 1992 caught the eye of many fledgling companies. Pasta companies, cable companies and mining companies converted to gaming companies overnight, and Wall Street didn’t care that they had no operations, no experience and no money to enter the industry. Never before did worthless swamp land in Mississippi, land which could never be developed into a casino, get such a high valuation from the herd on Wall Street.
Jump back to early 1999 and you are seeing the same thing happen in the Internet gaming industry. The meteoric rise in the stock price of Starnet Communications ($0.59 to $27) in just a few short months, the appetite of Wall Street for anything with a "dotcom" or "Internet" in its name, coupled with the mainstream casino index being one of the top performers in the 1st quarter of 1999, has once again piqued the interest of many a fledgling company. We have seen mining companies, flight simulator companies and food companies turn into Internet gaming dotcoms overnight. In fact, it appears that as of August, there are now more companies who say their business model has something to do with Internet gaming than companies who are involved in the mainstream casino business. Spurring all this on is the interest of mainstream casino companies—such as American Wagering, Park Place Entertainment, IGT, Innovative Gaming and Harrah’s—in either starting up or investing in Internet gaming.
The interest of mainstream companies just about closes the door on the chances of the majority of these converts to ever make money in this industry. There are just too many companies now saying they are going to be the "Harrah’s of Internet gaming." There will be many success stories, such as Starnet, Atlantic Int’l Entertainment Ltd., Virtual Gaming Enterprises and others, but the failures will probably outnumber the success stories by about 5 to 1.
While the results of the casino craze of 1992 backs up those bold statements, it should also be noted that there was a very different situation in the mainstream casino craze of 1992 and this current Internet gaming frenzy.
The casino craze of 1992 was caused by new areas considering and actually legalizing gambling in one form or the other. The Internet gaming craze of 1999 is being staged amid a backdrop of political maneuvering to officially deem Internet gaming illegal. While the enforcement of any bill such as the Kyl Bill has about as much chance of success as the enforcement of the laws which said that casino gambling in California by Indian tribes was illegal, shockwaves could reverberate through Wall Street on any noise coming out of the Kyl camp. Congress went on a long vacation in early August and the Kyl Bill was no where to be found on the Senate floor. Between September and December, there could be more important issues which pop up, causing Congress to once again shelve the Kyl Bill. But it is still out there and it is still a threat.
With the exception of the established companies—the ones who will someday be considered the pioneers of this industry—investments in many of these other Internet gaming companies should be considered speculative and a gamble. As we all know, there is nothing wrong with gambling, however, this is one time when you must know when to hold ‘em and when to fold ‘em.
The hype surrounding these companies present opportunities for aggressive and smart traders, however many of these stocks are not ones to buy for the grandchildren and to hold forever. The types of companies which convert to whatever industry is hot these days are the types that do this every few years. That means that they get into a hot industry, usually late in the cycle, run up their stock, raise a bunch of money, and, when the hot industry goes cold, they revert back to waiting for the next hot group to come along and convert to that type of company. Money management and research of these companies is imperative, but most of all, remember to have fun and not to bet the farm.
