Scrutinizing InTrades financial statement for 2008

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Jesse Livermore (the &#8216-nom de plume&#8217- of an InTrade trader):

Now THIS is interesting.

Midas Oracle has obtained the shareholder reports for Intrade. Links here, here, and here.

I do quite a bit of investing in the stock markets and read plenty of financial statements, so I feel reasonably qualified to comment. Keep in mind that Midas Oracle does not have the full documents, so there are footnotes which might be materially relevant.

-Total member funds on deposit were about 7 million euros in 2006 and 2007 (for the combined Tradesports/Intrade entity), and $14 million for Intrade alone on September 30th, 2008. Reassuringly, members&#8217- funds are properly segregated and listed as both assets and liabilities.

Intrade currently has about $1.2 million in cash net of debt. They list only $11,692 as Fixed Tangible Assets. That&#8217-s the category that includes computers, servers, office furniture, etc. I suspect this is low because of accounting rules. The value of tangible goods is generally amortized over a period of a few years. For example if you buy a computer, it will lose value over time, even though it does the same job it always did. The amortization rate varies, but a typical method might have computers lose 1/3rd of their purchase price each year.

Intrade/Tradesports has lost money in all of these years. 950,000 euros in 2006, 1.4 million euros in 2007, and $800,000 in the first 9 months of 2008. This seems to have everyone in a tizzy, but I don&#8217-t see anything to worry about. 1) The last 3 months of 2008 were probably the most profitable in the site&#8217-s history. Election trading really zoomed up, plus they got all the expiration fees once the election finished. Not sure if that put them in the black for the year, but it was probably a profitable quarter. 2) Intrade is really a start-up. Sure, they&#8217-ve been in business in various forms for several years, but there&#8217-s the potential for massive growth in the future. In particular, when the legal status of prediction markets is clarified, their user base could grow very quickly. If UIGEA is repealed or amended, or if the CFTC certifies their legality in the US, they could eventually grow to be like the NY Stock Exchange or Chicago Mercantile Exchange, which are valued in the hundreds of millions of dollars. Bottom line, it makes sense for the directors to continue to lose money at this stage in the hopes of a huge payoff later on.

-There is no accounting at all for the intangible assets of Intrade. The Intrade brand name is valuable. When the Economist or any other media source wanted to estimate the odds for the presidential election or any other current event, their first stop is not Hubdub or Predictify or any of the other play-money sites, it&#8217-s Intrade. For real-money current events betting, it is the first and last place to go. If Intrade were sold, I would expect it would go for a large multiple of its book value, maybe in the $10 million range or above.

4 thoughts on “Scrutinizing InTrades financial statement for 2008

  1. Chris F. Masse said:

    “they could eventually grow to be like the NY Stock Exchange or Chicago Mercantile Exchange, which are valued in the hundreds of millions of dollars.”

    True, but the figure is inflated.

  2. Daniel Horowitz said:

    Actually I think it’s important to mention that the CME and many other exchanges are valued in the billions of dollars. Additionally, there are hundreds of these exchanges across the world, many trading roughly the same commodities (i.e. In aggregate their value is immense.) And, they are growing fast. New exchanges are opening up in different Chinese provinces all the time.

    At some point in the future (post regulation), *I predict* public facing exchanges will likely be worth many billions if not significantly more. Intrade certainly has a chance to grab a piece of this market. Intrade’s main concern will be competing with the major players post regulation. These could include, Betfair, MGM, CME, Google and many others (Hopefully an open source solution :). Thus, one of their likely exit strategies is to be acquired immediately post regulation. This value will be largely determined by how big (#users) they can grow the business in the current unregulated environment.

  3. Chris F. Masse said:

    Thanks for your comment, mister Daniel.

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