As online poker returns to the US, one company has a lock on its massive revenue stream.
Investments with the potential for multibagger returns are difficult to find. So when I find one right under my nose, one that I think has 200% potential, it demands some rigorous analysis.
When an average Joe named Chris Moneymaker won the 2003 World Series of Poker Main Event, poker everywhere exploded. From card rooms to the internet, poker took the world by storm, and I was swept up along with it. Every time I logged in, I was playing with people all over the world. There were always tens of thousands of people at the table. 24/7. And each person was paying the poker site to play, either through tournament fees or rake.
Dozens of poker sites opened, but only a handful captured large bodies of players and quickly became the big brand names: Full Tilt, PokerStars, UltimateBet, Absolute Poker, and Party Poker.
Massive Growth for Online Poker
Several companies were listed on foreign stock exchanges. PartyGaming has a mere $10 million in revenue in 2002, but by 2005, it had exploded to $859MM, with 59% EBITDA margins. PartyGaming held a 41% market share at the time, and PokerStars had a 13% share, a distant second. By the time PartyGaming went public in 2005, it was valued at $8.5 billion. Its 2006 mid-year report showed 51% revenue growth and 42% increase in EPS. Its 2007 annual report showed online poker revenue growth exploded 163% from 2003 to 2006.
Sportingbet, the parent company of Paradise Poker, went public in 2004, and in 2005 showed an 89% increase in rake, 70% increase in net income and 136% revenue growth.
By 2006, there were 23 online gambling stocks on the London exchange representing some $25 billion in market cap.
Beginning of the End
Then, in 2006, Congress passed the Unlawful Internet Gambling Enforcement Act. This effectively prevented the vast majority of payment processors from legally operating in the US. Players could not transfer money into or out of online gambling websites. Seven billion dollars in market cap vanished from the publicly held companies on the London stock exchange, with PartyGaming stock falling 58% and Sportingbet fell 64%.
Several gaming sites pulled out of the US entire, as did numerous payment processors. The sites still generated revenue growth between 10% and 30%, even without US players, which had accounted for more than 70% of their business. PokerStars, Full Tilt, and Bodog became the monsters in the sector as poker revenue fell drastically across the sector.
Then, in 2011, the DOJ seized the domains of FullTilt and PokerStars, and indicted its owners. This marked the nadir of online poker. I gave up the dream of investing in a public vehicle. Perhaps it was for the best that they were on foreign exchanges so I missed the big blowup.
Resurrection for Amaya Gaming Stock
Then, something big happened. A big, big change.
Earlier this year, a publicly traded Canadian company, Amaya Gaming (OTC:AMYGF), purchased PokerStars and Full Tilt, and the acquisition closed in August. These two websites hold a combined 67% market share in online poker.
Prior to the acquisition, Amaya Gaming provided interactive gaming and lottery systems. Third-party content providers would offer their games on Amaya’s servers, which included online and mobile slot play, video poker and table games. Amaya gobbled up Chartwell Technology and well-established Cryptologic to beef up its offerings and support.
Then Amaya purchased OngameNetwork in 2012, which added poker to its brand. Cadillac Jack also was purchased for access to Class II and III Tribal and Commercial gaming markets in the U.S., and Diamond Game for its lottery platform.
Cadillac Jack has received approval to offer slot machines in New Jersey in land-based casinos. It was able to do this because, in 2011, the Department of Justice ruled that Federal Wire Act only prohibited online sports betting. Thus, all other forms of betting were permitted at the Federal level. New Jersey passed a bill in 2013 that gave state permission for online gaming, and the Cadillac Jack deal was done. Nevada and Delaware also have come aboard to legalize regulate online gaming.
Boom Times Coming
Online gaming has its nose in the tent, and I believe this is the beginning of online poker’s spectacular return to the US. As with all growth businesses, the company with first-mover advantage and brand recognition is going to win the day….and that’s exactly what Amaya’s strategy is. It has already applied for trademarks for Full Tilt Poker in the US.
Both the company and a state senator have hinted that a huge announcement about New Jersey was just around the corner.
Delaware has approved online poker, so there is no reason for Amaya to wait to move there.
Meanwhile, twenty licenses have been issued in Nevada alone. Several are partnering with the big casino operators, but only a handful will grab the market, and Amaya will be one, if not THE one. Furthermore, there is the necessity for experience in management and execution. You can’t just set up a poker site and rake in the money. You need branding and marketing savvy and experience.
But what’s attractive about Amaya Gaming stock is that it is offering its platform to other gaming operators, meaning it just sits back and collects the fees.
These will not be the only three states to permit online gaming. Anywhere that tribal or riverboat casinos exist are likely going to open up as markets. That not only means Amaya’s current businesses will be able to operate there, but so will the new online poker platforms. Eventually, I see numerous states approving online gambling as they salivate at the tax revenue, particularly in an era where state budgets are facing mounting deficits and unfunded pension liabilities.
How many states will approve online gambling? Considering that 47 states presently allow some form of gambling — either pari-mutuel, racetrack, lotteries, tribal, or commercial (like poker rooms or casinos), the foundation exists.
Of these, 21 permit some forms of commercial gambling (casinos, riverboats, poker rooms, etc). Legislatures will have a hard time denying Amaya’s lobbyists the right to offer games in these states, and greedy politicians will welcome the additional tax revenue.
Of the 29 states that don’t permit commercial gambling, 19 legislatures will find it hard not to climb on board, given that they permit it on tribal land, and of those, 8 permit both lotteries and racetrack betting.
The demand is there. Amaya’s lobbyists will press the issue. Most of all, the poker community is vocal about it. If we examine the history of enabling legislation on everything from riverboat gaming to payday loans, the pattern is often similar. The initial wave of 3 or 4 states takes couple of years (by 2015), other states wait a year or two to see how things play out, then there’s the “gold rush” where most of the others rush bills through within 2 years (2017-2018), with a few stragglers coming in at the end (2019).
Lawrence Meyers owns shares of Amaya Gaming stock.
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