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This Stock Is Up 358% Over the Last Year and Still Has Room to Grow

Since poker exploded in popularity around a decade ago, I’ve been a casual player.

I play a little online, and once or twice a year a friend will join me at the local casino so we can play in a Texas Hold ’em tournament. I like to play aggressively, mostly so I can either amass a bunch of chips or bust out early and park myself at the buffet. Either way, I’m usually happy with the result.

Although the number of players participating online has declined since the industry’s so-called Black Friday in 2011 (when the United States government essentially banned its citizens from playing online poker), there remains a core group of players around the world who are crazy about the game.

Most of the casual players have abandoned the game. I used to be able to hold my own whenever I’d go play. Now? As Warren Buffett said, if you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy. I’m usually the patsy.

When it comes to the business of gambling, Amaya Gaming Group Inc. (TSX: AYA) certainly isn’t the patsy. The company had a nice business developing the software for slot machines and other gambling devices when it came across an opportunity to buy the two largest online poker sites, Pokerstars and Full Tilt Power. Full Tilt was hit exceptionally hard after Black Friday, so it agreed to be purchased by the much stronger Pokerstars in 2012. The purchase price was $731 million.

Oh, the difference a couple of years makes. In June, Amaya announced it had reached a deal to acquire both companies for an all-cash price of $4.9 billion. After closing the acquisition in August, the company announced its updated guidance for the rest of the year. Revenue is expected to more than triple from approximately $200 million to $700 million, while EBITDA would increase from $80 million to $275 million. Those are some huge increases, even though the year is already half over.

Is it any wonder why shares are up more than 100% since the acquisition was announced, and 358% over the last year? Excuse the pun, but this was a game-changing move.

On the surface, shares look incredibly expensive. They trade at a price-to-earnings ratio of more than 115x, and the balance sheet is about to be buried under a mountain of debt. But looking forward the valuation doesn’t look that bad. Analysts expect the company will earn $1.84 per share next year, which puts it at a reasonable forward P/E ratio of just less than 17 times.

It’s not as if the company paid a huge multiple for its new prized acquisition. Pokerstars and Full Tilt Poker brought in revenue of $1.13 billion in 2013, growing nicely from revenue of $976 million in 2012. Net income from the two sites was $422 million and $314 million, respectively. Paying 12 times earnings for a company that grew the bottom line by nearly 30% year over year is a pretty good acquisition, even if the growth rate slows.

Not only is there the possibility of the company acquiring another poker site — rumors are already swirling about 888Poker — but Amaya also has potential to grow its other two businesses. It’s already delivering online games that were just recently made legal by the state of New Jersey, and it designed the online poker platform recently put into use in Nevada.

If these two states are just the beginning of a wave of legalizing online gaming, Amaya is well positioned to seize the opportunity. And even if it isn’t, there’s still plenty of potential to expand into other areas of gambling, like betting on sports.

It’s hard to be bullish on a company that’s done so well so quickly, but the sky really is the limit for Amaya. Cash strapped U.S. governments should eventually come around and allow online gambling in each state. It just made a terrific acquisition, and there’s still plenty of opportunities for growth. This company could be the next gambling powerhouse.

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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