Online Gaming: The House Always Wins, But Can You?

Intertain Group Ltd. (TSX:ITX), one of only a handful of online gaming stocks listed in Canada, deserves a closer look.

People across the world are now unwittingly addicted to the screens they carry around in their pockets all day. While most people are probably on social media most of the time, a growing number of mobile internet users are playing games, especially casino games. Depending on where they live, these games could be played with real money, real stakes, and legitimate casino rules.

The global market for online gambling and games like poker, blackjack, rummy, and bingo is currently worth an estimated $143 billion. Industry experts expect the market to expand 11.8% every year for the next five years, which means the market could be worth $280 billion by 2023.

It’s a massive sector with growing potential. As more countries relax the rules on online gambling, internet penetration and disposable incomes in emerging markets rise, and users get increasingly comfortable with paying for virtual goods and games, companies in this sector could be in for a windfall.

One of these companies is Toronto-listed Intertain Group (TSX:ITX). With a market cap of over $215 million and annual revenue of $509 million, the company is one of the biggest pure-play online gambling stocks in the country.

Most of the company’s revenue is generated across the pond in Britain. Due to its relaxed gambling regulations, the U.K. is by far the largest market for online gambling and bingo. This was part of the reason Intertain decided to strike a deal with London-based Jackpotjoy PLC (LSE:JPJ).  

JPJ is now the indirect parent organization of Intertain, which gives the Canadian firm access to tremendous resources. Shares with the ticker ITX can be exchanged for shares in Exchange Co., a holding company that controls shares in JPJ.

JPJ is the market leader in online gambling that is not targeted at men. Instead, most of its games are based on bingo. Because of this, 71% of the company’s customers are female.

With less competition in bingo-led games, JPJ holds 23% market share. According to the company’s most recent filings, revenue and earnings before interest, taxes, and depreciation (EBITDA) are up 13.8% and 12.4%, respectively, compounded over the past three years.

However, the company has been making a net loss over the past few years. Revenue and earnings from its core Jackpotjoy division are down this past quarter, while growth seems to be coming from Vera&John, a smaller division of the group.

In a recent statement, the company’s management admitted that revenue growth would continue to come under pressure until the second half of 2019. In a high-growth market like online gambling, this outlook is worrisome.  

Add to this the fact that Spruce Point Capital, an activist hedge fund, highlighted some red flags in Intertain’s accounting before the acquisition makes the picture murkier. Intertain’s leadership team now controls the combined venture.

Intertain is a company with a convoluted ownership structure, operating in a tightly regulated foreign market, with unpredictable earnings. Although the macroeconomic shift to online gaming and digital gambling is interesting, I don’t think Intertain is the best way to gain exposure.

The house may indeed win here, but shareholders should stay away.

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 Vishesh Raisinghani has no position in any of the stocks mentioned.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »