This Is Not The Way To Gamble
by Tom Dyson
August 23, 2006
On paper, everything looks first-class...
They have an original product that could change the poker world forever… half-a-dozen tables already installed in casinos in the USA… and a contract to supply tables to the entire fleet of Carnival cruise ships. Two other cruise lines are also interested in joining the program.
“In ten years, this could be a billion-dollar company,” I thought to myself.
After all, it’s time for a change. The poker industry is well suited to technology and automation, yet its mechanics haven’t changed in 200 years. The first company that pulls this off will make a fortune… I thought it could be Pokertek.
Here’s what I’m talking about:
A computer can run a game of poker far more efficiently than a human dealer. Look at online poker. You don’t need cards, chips or a flesh and blood dealer to play poker. Everything can be automated, even in a brick and mortar casino.
Automation has many benefits. The game moves twice as fast, so the casino’s revenue doubles and players get more action. The dealer is axed, so the casino saves on wages and the players don’t need to tip. No more betting errors or bum deals.
Pokertek (PTEK) manufactures an electronic poker table called the “PokerPro”. It’s just as I described it above... touch screens in front of each player and a display in the center of the table for the community cards. To see your cards, you touch the screen and the ends curl up to reveal the suit and number. The computer controls chip counts, betting, and dealing.
I am a believer in on-the-ground research. Before I purchase a stock, I like to visit the company and interview the customers. Last weekend, I drove to Tampa Bay to check out the PokerPro tables in action. The Hard Rock Hotel and Casino there has two PokerPro tables up and running. Here’s what I found…
The card room at the Hard Rock is large... definitely bigger than 90% of the card rooms in Vegas. And busy. We arrive at about two o'clock on a Monday afternoon. I worry there won't be anyone there. Wrong. It's packed. I guess there were around 30 tables in this room. They are all being used. There was even a line to sign up on the table waiting list... something I'd never seen before.
Anyway, as I go to stand in line, I notice the two PokerPro tables, right at the front of the room, just next to where I am standing. Astonishing. No one is using them.
I couldn't believe - in a huge busy card room - no one was using either of the tables.
So I go to customer service and ask to speak to the person who knows most about these tables. I asked her why the tables are empty. She says, “players would rather hang around watching for five hours, and wait for a seat at a live table, than sit at the PokerPro.”
Wow.
Next I asked her if she could see a future for electronic tables... or maybe even the death of the live dealer in ten years' time. “No way. Our clientele come to the casino for the full experience. These things have their use, but replacing dealers is not one of them.”
One of the most important rules of investing is, “listen to the market.” I thought the PokerPro was a great idea. But in the casino, no one was using the table. The market told me I was wrong.
There's another thing. I don't have any confidence in the company that makes these things. For one, I left six messages with different people at Pokertek over the last couple of weeks…
I said I was an investment analyst with a large research firm and told them I wanted to write a story about them. They never called me back. This is a huge red flag for me.
Finally, this company is valued at $100 million dollars… but its earned only $763,000 in its entire life. That’s it. In fact, news just came out that the casinos in Oklahoma just decided to ditch their contract with Pokertek and return four PokerPro tables.
Now, I'd pay $100 million for a company with no sales if it had a great product that was flying off the shelves. But for a company whose product sits unused in a busy casino?
No way. Thanks to boots-on-the-ground research, my conclusion is this:
“In ten months, this could be a zero-dollar company…”
Good investing,
Tom
