Long thought of as a dependable sector of the market, the gambling business has been weak of late.
Las Vegas has suffered since the recession, but has bounced from lows set in 2009. Total wagers for Las Vegas Strip casinos fell 6.1% in August, but that was after five months of gains. Overall, the gaming business in Las Vegas is pretty good.
The same cannot be said for Atlantic City, long known as the gambling destination of the east coast. Gaming revenues are down some 50% over the last eight years, leading approximately a third of the casinos along the city’s famous Boardwalk to shut down. Hurricane Sandy ravaging the area in 2012 sure didn’t help either.
Atlantic City has a bigger problem though — competition. New Jersey used to be the only destination for gamblers in the northeast. Now, New York, Pennsylvania, and Maryland all have new casinos.
The other thing that’s hurting the U.S. gaming industry is the rise of foreign markets. Macau has become the largest gaming destination in the world. Japan is moving towards liberalizing its gaming laws, South Korea has made it clear it wants to increase its revenue from gambling, and Singapore is also a sizable presence. That means Asian players have options a lot closer to home than Las Vegas.
Additionally, there’s the 900-pound gorilla in the room, online gaming. Players like it because they can play from the comforts of their own home, and less casino overhead means more generous games. Casinos like it too, since they’ll never have to kick out somebody playing from home for being too rowdy.
There’s just one problem. It’s mostly illegal for Americans to bet online.
Three states — Nevada, Delaware, and New Jersey — are currently testing out systems that allow players to gamble online, but the system has many limitations. Players have to be physically within the state, for one. While New Jersey offers a full offering of games, both Nevada and Delaware players are limited.
Online gambling has been illegal in the U.S. since 2006, but the law was only sporadically enforced. That all changed in 2011, when the U.S. government cracked down on online poker, easily the most popular choice among internet gamblers. Within a day, 1.8 million U.S.-based players were suddenly shut out of their accounts.
Outside of the U.S., online poker is still a booming business, and the best way to invest in it is through Amaya Gaming Group Inc. (TSX: AYA), which recently acquired the two largest online poker platforms, Full Tilt and PokerStars. The company paid $4.9 billion for the two platforms.
It seems like a huge price tag, but Amaya got a pretty good deal. The two platforms did $1.3 billion in revenue in 2013, for a profit of $422 million before taxes. And that’s up some 30% compared to 2012, where pre-tax profit came in at $317 million. Considering the growth, that’s not a bad price.
Right now, Amaya has a market cap of approximately $4.8 billion. Even if the online poker business just stagnates, you’re only paying 11.6x pre-tax earnings for it. That’s not terrible, especially considering the company’s new growth platform.
Both PokerStars and Full Tilt have been quietly testing a full casino offering throughout 2014. In November, management made it official, saying both platforms will offer a full range of other casino games in 2015, including blackjack, roulette, slots, and sports betting. Management is mum about the potential revenue impact, but has pointed out that approximately half of its players are currently using other sites to play these other games. It could be a huge potential boon for 2015.
Amaya’s shares have done well in 2014, but there’s no reason to think this growth story is over. If you’re a believer in the story, shares are still a buy today, even close to 52-week highs.
