One of the internet’s earliest use cases was gambling. Companies took the idea of playing poker around a table and threw it online, allowing people to bet without leaving the comfort of their home. But those websites were not high quality, and there was a certain sketchiness to it.
Now we’ve got high-quality online gambling, and one of the most highly respected brands on the market is PokerStars, which is owned by Amaya Inc. (TSX:AYA)(NASDAQ:AYA). Through a series of very smart moves, Amaya has been diversifying into other types of casino games.
In my opinion, gambling on Amaya is a worthy decision, and if you were at the craps table, I’d tell you to roll the dice on this company.
The company has strong brand positioning. PokerStars has approximately 70% of the entire global online poker market, which puts it in an incredible position to generate revenue. As new jurisdictions open that allow online poker, I expect PokerStars to quickly move into those regions. When it comes to market share, players want to go where the most money is being gambled. It’s a network effect; as more money hits one brand, more money follows.
The company has expanded into casino games and sportsbook businesses. These provide a higher margin because, unlike poker, which is player versus player, casino games and sportsbook are player versus house. In Q1 2016, the company made US$60 million in revenue. Fast forward to Q1 2017, and that ballooned to US$86.7 million — a big jump.
This is particularly important because revenue for poker only grew from US$216.3 million in Q1 2016 to US$218.6 million in 2017. Because of how much market saturation PokerStars has, it requires that new jurisdictions open to really expand this base.
There are many jurisdictions interested in online gambling for possible tax revenue. In the United States alone, Amaya has applications pending in California, Florida, Illinois, New York, and Pennsylvania. Although it could take some time, each of these states presents an opportunity for millions of potential customers to get signed up. All told, it is estimated that poker would be a US$2-billion-a-year business if all the states allow it.
Then there is India. With more the Indian population getting online, they’re naturally interested in gambling. Rafi Ashkenazi, CEO of Amaya, said that the company’s goal is to capture 50% of the online poker market, which the company believes could be worth US$150 million in a few years. Frankly, I expect that the company will gain an even larger holding because of the network effects that PokerStars brings to the table.
Ultimately, an investment in Amaya is an investment in the idea that the world will soon allow online gambling. I believe those days are getting closer because countries around the world need new tax revenue sources. And with the Amaya brands, I see little reason this company won’t experience outsized returns.
One note: Amaya is rebranding to The Stars Group in August; therefore, you’ll want to keep that in mind if you add it to your portfolio.
