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Amaya Inc.: Should Investors Ignore The Issues and Buy This Stock?

There’s a lot to like about Amaya Inc. (TSX:AYA)(NASDAQ:AYA), with one huge exception.

Let’s talk about the good stuff first. About a year ago, the company agreed to buy Rational Group, the owner of Pokerstars and Full Tilt Poker, the largest and fourth largest online poker platforms, respectively. The two sites control more than 60% of the market, with Pokerstars being the dominant leader. The price tag for the deal was a lofty US$4.9 billion, but online poker is a pretty profitable business. In just a year, the company has made progress paying down some of the debt taken on with the transaction.

Now onto the bad news, which is a pretty big deal.

Amaya’s acquisition was perhaps the worst kept secret of 2014. For weeks before the news finally became official rumors were flying about Amaya’s intentions, getting picked up by all sorts of outlets. By the time Amaya officially announced the deal, the market had already long speculated it was going to happen.

This led to as many as hundreds of people making serious trades based on the news, some with ties back to Amaya. After a whistleblower informed authorities about the issue, Quebec’s securities regulator officially opened up an investigation on the company, trying to track what exactly happened.

In Saturday’s Globe and Mail, reporters Jacquie McNish and Niall McGee delved further into the story, discussing everything from details of what has now become Canada’s largest ever insider trading case, to the dubious past of one of CEO David Braazov’s brothers, which included criminal charges back in the 1990s.

As for the insider trading part, essentially the story goes like this. There was obviously a leak, and it looks to have come from one of Amaya’s middle managers. But at the same time, Amaya was shopping many different banks and institutional investors to get financing for the big acquisition. Any one of those big players could have leaked the news (either intentionally or unintentionally), which then took on a life of its own.

As I write this, shares are down more than 7% as investors are obviously spooked by the sheer scale of the investigation. If there’s this much effort being put into the investigation, it seems likely authorities will find something.

What should investors do?

What’s difficult for investors right now is the investigation is overshadowing what looks to be a pretty attractive stock.

Both Pokerstars and Full Tilt Poker plan to spend 2015 aggressively expanding into sports betting and casino games, two parts of the gambling market that tend to be more lucrative than online poker. This appeals to players because now they don’t have to have multiple accounts to play different types of games.

When testing the casino games in Spain, the company was able to get a double-digit market share without doing anything except offering an optional download to existing users. Imagine what it can accomplish with a coordinated marketing effort across many different markets.

The company also has a future in the U.S., which has largely banned online poker since 2011. Only three states — New Jersey, Delaware, and Nevada — have legalized online poker, and only against opponents in the same state. But as cash-strapped states get more desperate for revenue, look for online gaming to become more popular. Analysts surmise that Amaya’s recent NASDAQ listing is an effort to further its brand in the United States, paving the way for a continued presence there in the future.

Investors are getting all this at about 16 times 2015’s estimated earnings, and at just 12 times analysts expectations for 2016. In today’s market, that’s pretty darn cheap for a company with Amaya’s growth profile.

But until the investigation concludes, investors are taking a major risk by investing in this company. Sure, the company could get off with just a slap on the wrist or a light fine, but nobody really knows for sure. Until that uncertainty gets resolved, expect to see big moves in the stock as more news filters out. Perhaps investors might want to wait for everything to get resolved before taking a position.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

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