Over the last year, it’s been good to be a shareholder in Amaya Inc (TSX:AYA).
With one fell swoop, the company transitioned itself from a developer of software for online games and slot machines into the world’s largest destination for online poker with its acquisition of PokerStars and Full Tilt Poker in June 2014. The company spent a lot to acquire the two online poker giants, but analysts and shareholders alike were bullish that the US$4.9 billion price tag would prove to be a bargain over the long term. Both sites earned US$475 million in EBITDA in 2013, which means the price tag was pretty reasonable on that basis at least.
Things were going pretty smoothly for the company until the end of the year, when Quebec’s securities regulator opened an investigation regarding suspicious trades of the stock right before the big acquisition was announced. At the time, rumours were swirling that the acquisition was a possibility. It wasn’t a very big secret.
Although nobody at the company has been officially charged with anything, this improper trading story refuses to go away. According to a recent Globe and Mail article, Yoel Altman, a company advisor and close friend to Amaya’s CEO David Baazov, is one of 300 investors who has been identified as making unusual trades of the stock. Others with potential company connections have been identified as well.
Even though nobody at the company is currently under investigation, this still doesn’t look good.
As more layers of this onion get peeled back, the stock is selling off on the news. After recovering to more than $37 each by the end of February, shares have recently slumped to $29.
Considering all the baggage, is the company a buy at these levels? Let’s take a closer look.
The growth story
Amaya has one big goal for 2015. The company plans to use its existing platform to expand into casino games and sports betting.
The company tested the concept with its players in Spain in late 2014, and results were pretty good. With no additional marketing, besides an offer given to each player, more than 30% of players ended up playing at least one other game. With a big marketing push, that conversion rate could be even higher, not to mention any new signups that aren’t interested in poker.
The big nut to crack is the U.S. market, where online gaming is largely illegal. Three states—Nevada, New Jersey, and Delaware—currently allow online gaming for state residents, with California rumoured to be close to being the fourth. Amaya currently provides the software to many of the online providers.
But that’s a small prize compared to getting online poker legalized nationwide. Proponents of the game say it’s just a matter of time, and the technology part of it is fairly easy. Nothing looks promising at the moment, but perhaps another democrat president in 2016 could be helpful.
If the U.S. legalizes online gaming nationwide, Amaya would have a huge growth opportunity.
Is it too expensive?
On the flip side, Amaya’s stock is currently pretty pricey. Shares currently trade hands at a P/E ratio of nearly 50.
But that number is based on only one quarter of results that included the new crown jewel, and even then that quarter was mired in acquisition costs. Analysts project the company will earn $1.89 per share in 2015, which puts the company at a pretty reasonable forward P/E of 15.5. That number doesn’t include a whole lot of growth from other games either, which means earnings could be even better.
Additionally, of the four analysts that rank the stock on the TSX website, three call the company a strong buy, while the other calls it a moderate buy.
For investors willing to look past the ongoing investigation, Amaya’s shares look to present a pretty compelling thesis at these levels. They trade at a reasonable forward P/E ratio, and there’s still growth potential. This darling of 2014 could perform pretty well in 2015 too.
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Fool contributor Nelson Smith has no position in any stocks mentioned.