Online gambling represents one of the fastest-growing industries in the world. In 2017, the market was valued at $45.8 billion. By 2024, its value should surpass $94 billion. Afterwards, most estimates expect it grow an additional 10% annually.
Since 2010, the company’s stock has increased by nearly 2,000%. While future growth won’t be as rapid, there’s still plenty of money to be made.
Since June of 2018, Stars Group shares are down around 60% as the company has battled several near-term headwinds. Over the next five to 10 years, however, the story hasn’t changed.
Here’s why now might represent the best time to invest in Stars Group stock.
The recent decline is justified
It’s important to note that the online gambling market as a whole remains incredibly strong. Nearly every year brings more users, higher activity, and new opportunities. Stars Group’s decline is purely of its own making. Two factors have been punishing the stock lately.
First, in April of 2018, the company purchased Sky Betting & Gaming in a deal valued at US$4.7 billion. Note that the deal value was higher than the current market cap of Stars Group today, representing an incredible destruction of value.
To finance the deal, Stars Group needed to sell 17 million shares at US$38 each. It also sold US$750 million in unsecured notes due 2026, a deal that was later upsized to US$1 billion. With an interest rate of 7%, that debt wasn’t cheap.
While the transaction made Stars Group the biggest publicly-trade online gambling company in world, it was clear management had become desperate for deals. Earlier, it launched a failed attempt to purchase another rival, William Hill plc.
Today, the combined company is certainly larger, but it’s saddled with a heavier debt load and a less-focused business model.
The second headwind pressuring the stock has been a potential US$870 million lawsuit filed against the company by the state of Kentucky. Recently, the Kentucky Court of Appeals reversed the payment, noting that “allowing a complaint, like the one put forth by the Commonwealth, to move forward would lead to an absurd, unjust result.”
Still, the case isn’t finished, remaining a big potential liability.
Should you buy this cheap stock?
Following the 60% decline, it’s tough to argue that Stars Group isn’t cheap based on most valuation metrics.
In 2018, the company is set to earn around $3.30 per share, meaning that shares trade at less than ten times earnings. Next year, earnings are set to grow yet again, so this isn’t the case of a cheap stock being cheap due to shrinking opportunities.
While the next 12 months could be volatile, long-term investors should be rewarded. Overpaying for an acquisition can be value destructive, but in this case, won’t sink the company. Once the operations are consolidated and the company returns to paying down costly debt, expect Stars Group’s valuation to improve.
Stars Group stock has all the characteristics of a beaten-down stock where all the pressures are near-term. This looks like a great buy-and-hold opportunity.
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Fool contributor Ryan Vanzo has no position in any stocks mentioned.