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Is Amaya Inc. a Good Play on the Coming Online Gambling Revolution?

Despite attempts by regulators in many jurisdictions, it seems that it’s only a matter of time before online gambling becomes legal. With governments desperate to bring in more tax dollars, and people spending more time online, I can’t imagine that politicians will be able to say no for long.

With that in mind, investors have to ask if Amaya Inc.  (TSX:AYA)(NASDAQ:AYA) is the right company to own for exposure to this space. Despite being one of the larger poker brands in the world, Amaya has certainly had its fair share of drama, making it a tricky recommendation. However, I believe the strategy the senior team has put forth should make Amaya a far more lucrative company in the coming years compared to where it is today.

The big step for Amaya was its diversification away from just poker. While online poker still accounts for 70% of the company’s revenue, it is now generating a growing portion of revenue from casino games and sportsbooks, which both come with far higher margins than poker. And all trends point to the company seeing increased growth in those other games without any real cannibalization of its dedicated poker audience.

In Q4 2016, it had 2.5 million active poker users — up from 2.47 million in Q4 2015. This has been a relative constant for the company for the past couple of years. In Q4 2015, it had 440,000 unique players; fast forward to Q4 2016, and that had grown to 650,000. The sportsbook business grew from 130,000 players to 250,000 players in the same time.

So, poker growth didn’t drop, but its other businesses saw an increase. And if we look at revenue, poker accounted for 78% in Q4 2015 with casino/sportsbook at 17.2%; a year later, that was 70% and 25.6%, respectively.

Amaya’s adjusted net earnings were also strong. Comparing Q4 in 2016 to 2015, adjusted net earnings were up 30% to US$107 million from US$82.3 million. Year over year, they were up 26% to US$366.7 million from US$290.8 million. What should make investors happier is that the company is guiding US$400-430 million in adjusted net earnings for 2017, which is another significant boost from where it is today.

Should you buy?

That’s the million-dollar question.

Ultimately, buying shares of Amaya is buying the belief that online gambling will be legal across the world and, most importantly, in the United States, which has a large gambling population but, for the most part, doesn’t allow for much online play.

Looking at where Amaya generates its revenue, the European Union accounts for 63% with the rest of Europe adding another 18%. The North, Central, and South Americas as a whole account for just 13% of its revenue. If we start to see jurisdictions in the United States approve online gambling, this company is going to experience significant growth.

So, buy Amaya if you believe that online gambling will be a bigger, approved, regulated business in the coming years. While I see that happening at some point, it could take time for the laws to be written and passed. If one thing is true, it’s that government moves slowly.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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