Betfair had lofty ambitions when it headed for the stock market last autumn. “There is an argument,” said David Yu, the chief executive, “that we should be considered alongside the leading internet players like Facebook and Google.”
The online gambling group, which allows punters to bet against each other rather than with a bookmaker, was supposed to be Britain’s answer to the tech floats that have dazzled America. In the eight months since going public, however, Betfair has gone from dotcom darling to stock market shocker.
The shares have virtually halved, sales growth has been muted and last Monday, Yu, the tech specialist who has run the company since 2006, announced he would be standing down next year.
It had all seemed so promising. The company, which makes money by collecting a commission on winning wagers, came to the market on a sea of hype, and with investors desperate for a piece of the action.
Spurred by comparisons with Google, Amazon and eBay, it had hoped some of the Silicon Valley stardust would rub off on the Hammersmith, west London, betting firm. As it turned out, while tech stocks are hot, gambling shares are not.
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Floated at £13 a share, valuing the group at £1.4 billion, Betfair’s stock made a barnstorming market debut. That first day of trading, October 22, saw it race up 19% to £15.50. It’s been downhill since then. Today, the shares stand at 770½p.
The sale of just 15% of the company’s shares at float was intended to provide a partial exit for the company’s backers, some of whom had been shareholders since it was launched in 2000. The two founders — Ed Wray, who serves as chairman, and Andrew Black, who stepped back from the company — sold shares worth £30m in the float.
By the company’s own admission, revenue growth from what it terms ‘core Betfair’ has slowed But many of those who bought when it went public have not been as fortunate. “It’s not Facebook and it’s not Google,” said one leisure analyst. “They need to regroup, put their hands up and say we are a gaming company. That has to be the focus.” Another analyst said: “It’s a bookie and it has regulatory risk — that’s why the share price has come back to £7.”
Yu is unrepentant, and insists the comparisons with the likes of Google and Facebook remain valid. It might not have billions of users but it has a social networking-style set-up. He said: “We are a technology-led business like other online leaders. We revolutionised an industry like other online leaders.”
The problem with Betfair, according to some observers, is that its greatest innovation — the technology that allows its customers to cut out the bookie — is now more than a decade old. “People talked up the company at its float as though it was some sort of revolution but the revolution happened years ago,” said John O’Reilly, former head of online at Ladbrokes, the bookmaker.
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Betfair initially terrified traditional bookies such as Ladbrokes and William Hill. But in the 11 years since it launched, its rivals have sharpened up. Established players, along with newer entrants such as Bet365 and Paddy Power, have all narrowed the gap.
Yu bristles at the idea that the company has not been creative enough, pointing out that it was a pioneer of “in-running” betting, where punters place bets on an event while it is under way, and is strong in betting via mobile phone. Last week, it signed a deal with gaming software specialist Openbet to improve its mobile offer.
However, other changes make Betfair seem rather like many of its rivals. For example, it has even started putting fixed-odds bets on its site, something it wants to do more of. The firm denies such changes are a sign of slowing growth on the betting exchange. “We are giving customers what they want,” said Yu. “In 2004, we added poker because our customers wanted to play poker. We added an online casino because they told us they wanted to play casino games. Fixed odds is the next step.”
Maybe. But by the company’s own admission, revenue growth from what it terms “core Betfair” — that is, the exchange and games such as poker — has slowed.
Between 2008 and 2009, revenues jumped about 20%. This fell to a 5% rise the following year. Results published last week for the year to April 2011 showed revenue growth of nearly 8% in core Betfair, partly helped by the 2010 World Cup.
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Yu conceded that the performance was disappointing, and blamed several factors. These included changes in the system used to power the group’s poker operation, which led to the loss of some big-money players.
More embarrassingly, Betfair’s website crashed for several hours on the Saturday before the Cheltenham Festival, one of the biggest events in the racing calendar.
While sales growth is slowing, the company could at least point to better than expected profits and a higher than forecast dividend.
More surprising still was the news that Betfair would kick off a £50m share buyback programme, normally the sort of thing one expects from mature companies that cannot think of anything better to do with their cash.
In seven years as a quoted company, for example, Google has never paid a dividend, let alone started buying its own stock.
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Betfair, which has £155m of cash on its balance sheet, can afford to both fund all its investment plans and buy back its stock, insisted Stephen Morana, the company’s finance director.
Investors might hope that any future investments fare better than LMAX, Betfair’s first attempt to deploy the technology behind the betting exchange for other businesses.
LMAX was launched towards the end of last year as a share-trading platform, but in its first few months it has failed to meet expectations. Its chief executive resigned in March and Betfair hopes a shift in focus towards currency and commodity trading might boost LMAX’s fortunes.
The disappointing launch has dented Betfair’s credibility and insiders concede that the company is unlikely to try any other new services until it has worked out what to do with LMAX.
Not all Betfair’s problems are entirely of its own making. In the prospectus published to promote its float, the company had identified overseas expansion as a key source of growth. So far, this has proved a forlorn hope.
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Governments in several European countries are regulating online gambling but expressly banning betting exchanges, which has proved a source of deep frustration at Betfair. This might explain the moves into fixed-odds territory.
“The process of regulation has been much stricter and less liberal than many people would have hoped,” said Scott Longley, business editor of Gambling Compliance, an industry news service.
All of this has combined to give Betfair a tough start to life on the public markets. A change of management may help. Some think that the group needs more figures at the top who clearly adore betting.
“How many of the board go home and spend the weekend betting?” asked one rival. “Andrew Black did that.” The hiring of Ian Chuter from William Hill as operations director is a step in that direction.
Analysts think that having halved, the only way for the shares is up. “There are significant challenges but at the current price the risk-reward profile is now more attractive,” wrote Nick Batram, leisure analyst at stockbroker Peel Hunt in a note to clients.
In other words, at this level, the business is a safer bet than it was.