After announcing a merger with Golden Nugget Online Casino or ”GNOG”, Landcadia Holdings II, Inc. (LCA) delivered double digit returns. Traders celebrated that the new online business may reach a market opportunity of $20 billion. Besides, the company expects double digit sales growth and already reports an EBITDA margin of 30%. We don’t know whether the Trump administration will help the online casino industry or not. However, GNOG is undervalued as compared to other peers. The company represents a clear opportunity among other casino and gaming players in the United States.
With over 600 games, Golden Nugget Online Casino offers gaming tools available on mobile, desktop, and tablet devices.
The company’s online business started in 2013. Google trends shows how the company’s website received a significant amount of interest from 2013 to 2019. In 2020, the interest spiked up to unknown levels because GNOG decided to share the business with retail and institutional investors.
There are several facts that indicate that GNOG’s business model could pop from 2020 to 2025. First of all, the company believes that it is targeting a market opportunity of more than $20 billion. The current enterprise value is below $1 billion, so there appears to exist room for improvement.
Besides, the COVID-19 pandemic appears to push the company’s sales growth. In New Jersey, the percentage of online gaming is expected to increase from 17% in 2019 to more than 44% in 2020:
According to GoldenCasinoNews, online gaming traffic increased 75% between Mar 12 and Mar 19 as more people changed their gaming habits amid the coronavirus outbreak. More than 20% people in the United States spent more time on gaming during the lockdown. Source: GoldenCasinoNews
Remember, if the COVID-19 situation gets worse, I would expect GNOG’s sales to increase. As a consequence, I believe that the share price will increase if the number of COVID-19 cases increases. The number of daily cases increased in July 2020. I cannot say what’s about to happen in the United States. However, clearly, the number of cases is spiking up.
That’s not all. There is another clear catalyst. The target market could increase quite a bit if new states regulate online gaming. Experts foresee that the total market opportunity in the United States could be multiplied by 27 in the future. In that case scenario, GNOC will most likely see an increase in its sales at a massive rate.
About GNOG’s Database
Investors need to get to know one of the company’s most attractive features. GNOG was created by a non-online casino corporation. It does not mean that they have a lot of know-how of how to manage a casino business. Additionally, they have access to a large database, which they can use to promote their online casino business. In a recent presentation to investors, I could read that they add 7,600 new members per week, which represents an impressive business opportunity for the company.
GNOG signed a merger agreement to acquire SPAC Landcadia Holdings II, Inc. If the deal closes successfully, GNOG will have access to the NASDAQ exchange. The merger is expected to close in the third quarter of 2020. In my opinion, if the merger closes, investors will most likely see the share price going higher. The deal will be very beneficial, not only because it will give the company a lot of visibility. GNOG will also be able to obtain liquidity from the market. More cash will most likely lead to more marketing expenditure, which usually pushes the company’s revenue up.
GNOG will become only the second pure publicly traded online casino company in the US. The transaction is expected to close in the third quarter of this year. Upon closing, Landcadia II intends to change its name to Golden Nugget Online Gaming, Inc. and its Nasdaq trading symbol to GNOG. Source: Press Release
I do believe that getting to know the conditions included in the merger agreement is very necessary. In order to consummate the transaction, both the buyer and the seller will need to obtain several approvals from governmental organizations.
First of all, they will need to wait for the applicable waiting period under the HSR Act. However, I am not very concerned about this condition because the company is not acquiring another competitor, but a SPAC.
The shareholders of Landcadia will also need to approve the transaction, which is not a complicated condition. Landcadia HoldCo was created to be acquired by a company like GNOG. That’s the business purpose of a SPAC. Thus, I would expect that shareholders would not block the deal.
Perhaps, the most worrying conditions are the gaming approvals, which the companies will need to obtain from governmental organizations in the United States. DraftKings Inc. (DKNG) executed a transaction, which was exactly like that of GNOG. So, in my view, most investors will expect the translation to be approved by regulators.
The obligations of Landcadia, Landcadia HoldCo, Seller Parent and the Acquired Parties to consummate, or cause to be consummated, the Transactions are subject to the satisfaction of the following conditions, any one or more of which may be waived (if legally permitted) in writing by all of such Parties:
- HSR Act. Any applicable waiting period under the HSR Act shall have expired or been terminated.
- No Governmental Order. There shall not be in force any Governmental Order, statute, rule or regulation enjoining or prohibiting the consummation of the Transactions.
- Requisite Votes. The Landcadia Stockholder Approval shall have been obtained.
- Landcadia Stock Redemption. The Landcadia Stock Redemption shall have been completed in accordance with the terms hereof and the Landcadia Purchase Proxy Statement.
- Reorganization. The Reorganization shall have occurred.
- Certificate of Incorporation. Landcadia Fourth A&R Certificate of Incorporation shall have been filed with the Secretary of State of the State of Delaware.
- Forfeiture and Call-Option Agreement. The share forfeiture transactions contemplated by the Forfeiture and Call-Option Agreement shall have been consummated in accordance with their terms.
Gaming Approvals. All Relevant Licenses required to consummate the Transactions and operate the Acquired Parties and their businesses in the ordinary course as contemplated from and after the Closing shall have been obtained (and the Relevant Licenses shall not contain, individually or in the aggregate, any Burdensome Condition). Source: Merger Agreement
2025 Sales Expectations: $635 million
The company’s expectations are optimistic. In 2019, GNOG reported sales of $55 million, and the company expects $86 million and $122 million in 2020 and 2021 respectively. It means that GNOG believes that a CAGR growth of 49% from 2019 to 2021 is realistic.
The company expects to have a share count of 68.3 million. At $14.0-15.0 per share, the current market capitalization would be equal to $986 million. The new entity expects to have a debt of $150 million and cash of $88 million, so the enterprise value would be equal to $1.048 billion.
If we use the company’s sales expectations of $122 million, GNOG is trading at 8.5x. GNOG mentioned that other competitors like DraftKings (DKNG) and Gan (GAN) trade at more than 15x 2021 sales and 12x sales. GNOG appears undervalued as compared to these competitors. In my view, at 12x-15x sales, the shares would be trading at $20-$25.
When I started researching GNOG, I was very skeptical about the company’s expected sales growth. Interestingly, DraftKings expects 31% CAGR growth from 2017 to 2021, which is approximately the same released by GNOG. From 2020, iGaming boom could result in a great spike in the sales of these companies.
The company provided a significant amount of information about its profitability in a presentation given to investors. The company’s adjusted EBITDA in 2018 and 2019 was equal to $11.1 million and $16.7 respectively. We are talking about an EBITDA margin of 26% and 30% in 2018 and 2019 respectively.
I don’t think that investors will care so much about the company’s profitability at the net income level. What matters on this name is the company’s sales growth and gross profit margin, which was 57% in 2019. In my opinion, if GNOG can report the same sales and gross profit margin for a long time, investors will push up the EV/Sales ratio even higher.
GNOG appears to be trading a bit undervalued as compared to other competitors. The fact that the company has not closed the acquisition of the SPAC explains it. Investors need to understand that we don’t have the company’s balance sheet. We do know that GNOG expects to have a debt of $150 million and cash of $88 million. However, we don’t know anything about the other liabilities. We don’t know whether GNOG’s account payables are large or whether the company’s contractual obligations are significant. As a result, many investors will wait for the company to close the deal and publish its financial accounts. Convervative individuals need a lot of information before buying or selling anything.
There is another clear risk coming from the Trump administration. We don’t know whether the Trump administration will accept having online casinos all over the country. If they decide to stop the development of the industry, GNOG would not be targeting a market opportunity of $20 billion. The total market size would be very small.
Interestingly, Trump did not want small firms operating in the gambling industry to receive funds when the COVID-19 crisis commenced. Shorts may claim that in the future, the White House could promote certain initiatives, which could damage the business of GNOG.
“Under the rules, which the AGA labeled as containing “antiquated” and “discriminatory” policy, “small” firms in or involved with the gambling industry are “ineligible to receive critical loan assistance” that would help them retain their employees throughout the COVID-19 crisis. It’s expected that the PPP will divvy out as much as $349 billion in forgivable loans.” Source: UsBets
In 2020, speculators and non-risk investors experienced massive stock returns because of GNOG’s casino business model. I must admit that there is a significant amount of catalysts, which can make the stock pop. If regulators approve the deal, the company will have access to financing, which may lead to additional sales and stock returns. Besides, when the company publishes its financial statements, more investors will have a look at the company. As a result, liquidity in the market will increase, which may lead to stock price appreciation. Like most investments, there are risks. We don’t know whether the Trump administration will promote the iGaming industry or not. With all, as of today, the company is undervalued as compared to other publicly traded competitors.
Disclosure: I don’t hold shares and I was not compensated for the article.
We send out an email notice to our subscribers when we publish new articles. To receive the updates, put your email address into the box and click the button: