Tech Beat: Betting on online gambling

Like the song says, “You got to know when to hold ’em, know when to fold ’em.” The same applies to investing in online gambling companies: Magna Entertainment Corp. (TSE: MEC.A) is a stock you might want to hold, while YouBet.com, Inc. (Nasdaq: UBET) would rate a “fold.”

Internet gambling has long posed a conundrum for lawmakers, who were unsure of how the rules that govern gambling in the offline world—a complicated mix of state and local laws—might also apply online.

The laws have gotten tighter, though, with the most significant step being taken last October, when President Bush signed the Unlawful Internet Gambling Act. The act bans American banks and credit card companies from completing transactions from most online gambling sites, such as Internet casinos and poker rooms.

A few online gambling companies have found ways to continue operating and even fewer of those do so in a way that looks legitimate enough to operate under the heightened scrutiny that comes with being a publicly traded company.

Both of the online gambling companies featured in this week’s Tech Beat have shown reasonably strong revenue growth, but neither has been very successful with investors.

Magna Entertainment of Aurora, Ontario, is a Canadian company that is not technically bound by U.S. laws. However, in the online gambling industry, where business is more dependent on the location of the customer base than the location of the company’s headquarters, its proximity to the United States and American gamblers means it is hardly exempt from strict U.S. laws.

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