THE company runs PartyPoker.com, the world’s most popular internet poker site. Its other online gambling businesses include StarluckCasino.com and PartyBingo.com.

Although Party Gaming’s shares trade on the London Stock Exchange, most of its business comes from the United States and it is licensed and domiciled in Gibraltar.

Party Gaming was formed in 1998 and went public this year in a flotation that valued it at almost £5 billion. However, the shares have fallen steadily since the company warned of a slowdown in growth last month, wiping more than £3 billion from its value. It is run by chief executive Richard Segal.

The two experts below have been selected for their skill in several investment areas. They, or the funds they manage, may buy or sell shares in the companies or sectors that are discussed in this column.

Andy Brough, fund manager at Schroders:

THE flotation of Party Gaming was almost like watching a game of poker from the world series.

The sellers played a blinder, as the hedge-fund community decided to go all in at the issue price. For a while it looked like the right call, but after the first set of results since the float in June, the shares have fallen from 175p to 79½p, which has wiped £3 billion from the value of the company.

With most of the investors in the market now doing impersonations of rabbits caught in the headlights, what should you do if you are holding the shares or looking to join the table? There is no doubt that internet poker is here to stay. The market continues to grow, albeit at a slower rate, and online gaming still accounts for only 3% of the overall market.

Internet poker is also incredibly profitable, as can be seen by the operating margins of 60%.

The main cost is that of customer acquisition and retention, with most sites offering incentives in the form of free bets or bonus cash. The problem is that there is then an incentive for players to keep switching between sites.

With margins this high there is room to offer more incentives and still be profitable. But the trend for margins is down.

Also, the sword of Damocles continues to hang over the whole industry in the form of the fact that nobody is sure if it is legal under the 1961 US Wire Act to operate gaming over the internet in America, where 86% of Party Gaming’s revenues are generated.

At some point the American government will have to do something about the huge amount of untaxed money leaving the country. Online gaming could be declared illegal or made legal, but both would be bad outcomes for Party Gaming.

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