Yesterday a private company called Ultimate Gaming launched the first-ever legal gambling website in Nevada.
Now, global online gambling was approximately a $28 billion industry in 2012. Of course, the United States only accounted for 11% of that; Europe accounted for 54%.
And that $28 billion in online gambling represented only 8% of global gaming revenue, most of which took place in casinos.
With as much as 30% growth over the next three years, online gambling could be a huge win for investors who get the right stocks.
So, what are the right stocks?
Unfortunately, Ultimate Gaming (which also owns the Ultimate Fighting Championship (UFC) franchise) is not a public company. So we’ll have to look elsewhere…
A Few You Don’t Know, Two You Might
I’ll start by throwing out a few of the big names in online gambling in the UK. Each of these stocks is available on the pink sheets.
In no particular order, we have:
- William Hill (WIMHF.PK)
- Ladbrokes (LDBKF.PK)
- Bwin.party Digital Entertainment (PYGMF.PK)
- 888 Holdings (EIHDF.PK)
- Betfair Group (BTFRF.PK)
Of these, a couple stand out with the potential to get into the U.S. market…
888 Holdings has partnered with a few casinos — like Treasure Island in Vegas, Caesar’s (NYSE: CZR), and WMS Industries (NYSE: WMS), which makes video games and video lottery and gambling machines.
Bwin.party digital entertainment (NASDAQOTH: PYGMF) has already been in the U.S. by virtue of its Party Poker brand. This brand was hurt when the U.S. cracked down on online gambling.
Bwin has partnered with MGM (NYSE: MGM), Boyd Gaming, and Zynga (NASDAQ: ZNGA).
Bwin has the better partners, and thus might make the better investment. (Boyd’s looks interesting as a value play, but it has a lot of debt… and as a casino operator, online gambling could hurt it.)
This is a small company with a market cap of just $1.7 billion and revenues of $1.04 billion. The debt situation is not bad, either: Outstanding debt is $47 million and the company has $219 million in cash.
The stock that intrigues me the most is Zynga (NASDAQ: ZNGA). The only problem is that as a public company, Zynga has been an outright disaster…
That’s Your Business Plan?!
Zynga IPO’d in late 2011 at $9 a share, ramped to $14, and then plummeted to $2. It currently trades around $3 a share.
If you don’t know, Zynga makes online games largely distributed through Facebook that are particularly effective for cellphone users (think: Angry Birds, only not as fun).
Zynga’s plan was to charge small amounts of money for certain things within their games. For instance, in Zynga’s Texas Hold ‘Em game through Facebook, you can buy like 3 million chips for $2. I guess the thought was that, with close to a billion Facebook users, Zynga wouldn’t have to sell much on a percentage basis; and the fact that people’s Facebook friends were playing the games would serve as incentive.
It always sounded like a business plan that was just good enough to get the company public and make the insiders some money… but ultimately destined to fail.
So I’m not surprised the company has lost over $600 million as a public company.
I am surprised the company did $1.1 billion in revenue in 2011 — and almost $1.3 billion in 2012.
And with online gambling gaining momentum (New Jersey and Delaware have approved it, and several other states have it on the docket), Zynga could be in a good position because of its relationship with Facebook. The technology already works, and it seems to me that people would be more likely to set up poker games among friends than play anonymously. So Facebook could be the prefect platform, and Zynga could be a big winner.
The stock currently trades for a little over $3. It has a $2.5 billion market cap, $1.27 billion in cash, and just $100 million in debt. Zynga could be worth a speculative investment at this point.
You might also consider Glu Mobile (NASDAQ: GLUU).
This $200 million company also targets the mobile phone user with its games. And like Zynga, it trades just over $3 a share.
Both companies recently launched online gambling services in the UK. Unfortunately, it’s too soon for any good data to be in on how well they are doing… but it’s a pretty good bet that both will move higher as online gambling makes headway into the U.S. market.
Until next time,
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
