Except for one minor hiccup at the end of the year, 2014 couldn’t have gone better for Amaya Inc. (TSX:AYA).
The company got things started in February with its acquisition of Diamond Game Enterprises, a privately held company that makes software for slot machines. The acquisition cost US$25 million and was expected to add $3.9 million to Amaya’s earnings before interest, taxes, depreciation, and amortization (EBITDA) over the full year.
But that news paled in comparison to what happened in the summer. In June, Amaya announced it was acquiring the Full Tilt Poker and PokerStars platforms from Rational Group for US$4.9 billion. Between the two platforms, combined revenue was US$1.3 billion for 2013, with an EBITDA of US$475 million. At approximately 10x EBITDA, that’s a pretty attractively priced acquisition.
Even before the deal was announced, Amaya’s stock surged, prompting the Toronto Stock Exchange to go as far as halting shares one day. This action caught the attention of Quebec’s securities regulator, which decided to take a closer look at what happened leading up to the big deal. Although nobody involved with the company is being accused of any wrongdoing, investors were still spooked when news of the regulators visiting Amaya’s offices in December was made public. Shares fell nearly 20% that day but have since made much of that loss back.
The company is convinced the investigation is much ado about nothing, and I agree. I suspect that once the company is cleared of anything to do with the probe, shares could shoot higher. Here are a couple more reasons to be bullish on the stock.
A great moat
When the acquisition of Rational Group was officially wrapped up, Amaya became the largest pure-play online gambling company in the world.
When it comes to online poker, PokerStars is the undisputed leader. It is well known that its platform contains the best players and has the most action, especially when it comes to cash games. Every serious poker player I know has an account on PokerStars.
Full Tilt Poker used to be the clear number two in the space, but it lost momentum when it narrowly avoided bankruptcy after U.S. poker players were shut out in 2011. It experienced some issues when it came to paying back the U.S. players’ bankrolls, which did cause some damage to its goodwill. The stats I found listed it as the fourth biggest online platform.
Owning both these brands is a big win for Amaya. How many players hop from one to the other without knowing they’re both controlled by the same company?
Expansion potential
Estimates are that the U.S. online poker market could be worth $2 billion annually if online gaming is legalized across the country.
It seems likely that this will happen at some point. New Jersey, Delaware, and Nevada have already legalized it for state residents, with California and its 30+ million people the next up to try it inside state lines. It wouldn’t be too difficult for it to roll out nationally, with each state getting a share of the action based on the wagers of its players. It’s just a matter of getting lawmakers on board.
The more immediate expansion plans involve the company leveraging its poker platforms to get into other casino games and sports betting. When the company tested the concept with customers in Spain, more than 30% of players tried other games as well. It plans to roll out other games across both platforms in 2015, along with a big marketing push. Both table games and sports betting should lead to more great top-line growth.
Although it is trading at 55x earnings, the future still looks bright for Amaya. The company is expected to more than double earnings to $1.86 per share in 2015, and management recently announced a plan to buy back up to 5% of outstanding shares. There’s still plenty of potential for growth past 2015 as well. It might just be the beginning of Amaya’s dominance in online gaming.
