Gambling is a huge business in North America. Every Canadian province has legalized it, with some allowing the private market to build casinos while others choose to have the provincial government manage it all. You can also gamble in 43 U.S. states, with the two biggest still being Nevada and New Jersey. Chances are, if you’re looking for a game in a major North American city, it won’t take you very long to find it.
But lately, the casino business is starting to suffer. Atlantic City has been hit particularly hard, thanks to a combination of damage done by Hurricane Sandy, nearby Pennsylvania allowing more casinos to open, and just a general weak economy in the area. Las Vegas is faring a little better, but that could just be the byproduct of the city’s successful efforts to diversify away from gaming.
If this trend continues, it’ll start to have a major impact on state government finances. Nevada and New Jersey are increasingly dependent on their cut of gaming revenues, especially as costs for things like public pensions and health care expenses continue to escalate. These states will eventually look for ways to stop the bleeding. There’s one easy solution, one that could mean a huge win for a Canadian company, Amaya Gaming Group Inc. (TSX: AYA).
Until the early part of 2014, Amaya was involved in two businesses. It was behind some online gaming platforms, running things like sports betting and lottery systems. It also programed software for slot machines. But all that changed in June when shares shot up on the news that the company was paying $4.9 billion to acquire Rational Group, the parent company of the two largest online poker platforms in the world, Pokerstars and Full Tilt Poker.
That seems like a lot to pay, but it turns out Amaya actually got a pretty good deal. In 2013 the two platforms did more than $1.3 billion in revenue and made $422 million before taxes. That compares to 2012 when the revenue and income before tax numbers were $976 million and $317 million, respectively. That’s a pretty low multiple for a company with such nice growth.
And the growth could be even bigger, if it can crack the elusive U.S. market.
While technically illegal, online poker flourished in the United States until 2011, when federal regulators finally shut it all down. Dubbed Black Friday by the industry, the move immediately wiped out between 25-40% of each platform’s customers overnight. It also landed some previous execs in some serious trouble with the U.S. authorities.
While online poker may never be as popular as it once was with U.S. gamers, it still represents a huge opportunity for Amaya. While nothing is imminent, there are some indications that the U.S. is warming up to the idea of legalizing online poker.
Currently, three states — Nevada, New Jersey, and Delaware — are testing small online gaming platforms for each state’s citizens only. If successful, they could serve as a model for rolling out something nationwide. And what better way to do that than to open the market back up to the two leading platforms?
The technology already exists to make this happen. All it takes is software to keep track of each player’s wins and losses, and automatically withhold a small portion of the total game for the state involved. It’s not a very big technical problem to solve.
Based on existing numbers for Full Tilt and Pokerstars, Amaya isn’t a terribly expensive company. If it could get the U.S. market back, earnings could easily increase substantially. I’m not sure it’ll happen, but there’s certainly hope. That’s the reason to buy this stock.
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Fool contributor Nelson Smith has no position in any stocks mentioned.