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As online poker returns to the US, one company has a lock on its massive revenue stream.
Continuing my analysis of Amaya Gaming (OTC:AMYGF), I’ll now delve into the company’s financials, valuation, and why you should be long the stock, as I am.
Amaya released info on its acquisitions and its combined financials, and the numbers are pretty spectacular. Full Tilt and PokerStars boast 85 million registered players. For FY13, the online poker sites generated $1.1 billion in revenue and EBITDA of about $473 million. Amaya paid $4.9 billion for them, or about 11 times EBITDA. Blackstone (NYSE:BX) put up some money, along with a host of other entities providing all kinds of debt.
Let’s take a look at the valuation. Wynn Resorts (NASDAQ:WYNN) trades for 11 times EBITDA. Las Vegas Sands (NYSE:LVS) trades for 10.77 times EBITDA. Even MGM Resorts International (NYSE:MGM) which is loaded with debt, trades for 6 times EBITDA. We can’t even value Caesars Entertainment (NYSE:CZR) because it is cash flow negative.
But here’s the thing – these are all land-based resort and casinos. Hotels are a capital intensive business, with more irregular cash flow. Amaya is almost entirely an online operation without expensive capex. So the notion that Amaya is trading in-line with other operations that have hotel components suggests to me that it is undervalued on a cash flow basis.
Amaya Gaming Stock Valuation
Where should it be valued at? We know that the market supported an $8.5 billion valuation of PartyGaming on the London exchange in 2005, when it had $859MM in revenue, and 59% EBITDA margins. Thus, EBITDA came in at $507MM. That’s just 7% more than FullTilt/PokerStars combination had generated.
That alone suggests a valuation of $8.5 billion for Amaya, and right now it sits at $4.14 billion at US$31.71 per share. Were it valued at $8.5 billion, or 17.7x cash flow, the stock price would be $65.
I believe the stock will move towards that stock price when it gets listed on the NYSE, which its CEO indicates is a major goal. Right now, the stock only trades on the OTC Market in the states, using the AMYGF symbol. The stock is somewhat illiquid, although it has been more so in the past few weeks.
It is possible that even an OTC order could get filled in Canada, although that’s unlikely. In that case, you are going to pay a currency transaction fee to exchange the money into Canadian dollars or to settle up in U.S. dollars.
You also can trade the stock directly on the Toronto exchange if your broker permits international stock trading. Again, you are going to pay both a trade commission and currency exchange fee, possibly in both directions.
I elected the OTC option because, while the spread was 12 cents, the currency conversion fee was 1% in both directions.
Once the stock is listed on a major exchange, it will attract more attention.
Amaya Gaming: Big Picture, Big Profits
There’s another wrinkle. Amaya’s strategy is clear. It wants to become the biggest public online gaming company, by gobbling up every premium asset it can. There’s some discussion that Amaya’s next target is Bwin.Party Digital Entertainment. It runs the once-popular PartyPoker, which had 2013 revenue of $792 million, operating income of $68 million, and net income of $54 million.
At 17.7x operating income, that adds another $1.2 billion in valuation, or another $9 to the stock price, for a fair value of $74.
That’s right now. It doesn’t even factor in the massive US market, for which Amaya holds the pole position. Remember, the US accounted for 75% of online gambling revenue before the UIGEA.
Morgan Stanley projects a $5 billion online gaming market in the US by 2020. Well, we are already there. It can only grow from here.
Little Risk vs Huge Reward
So what kind of risk are you taking? Not much, and that’s why this is an asymmetrical risk-reward scenario. Remember, Amaya paid $4.9 billion for the two massive owners of poker market share…and the stock is valued presently at only $4.1 billion.
You are buying in at a 20% discount to what Amaya thinks the acquisition itself is worth.
Massive resort-casinos with huge capex requirements and wobbly live gaming revenues are trading at a higher valuation. There is limited downside on a valuation basis. I think the biggest risk, frankly, is that this story isn’t as big as it should be, and the illiquidity of the OTC security makes it subject to some volatility.
Even though there is blue-sky opportunity in the US, which is the major market, let’s say nothing ever happens in the US. You are still buying in at a 20% discount to what Amaya believes the deal to be worth.
I believe that in the next few months, as the market discovers this story, we will see the stock go to at least $37 to match the deal’s valuation. Within a year, as news of Amaya’s move into NJ, Delaware, and Nevada become known, it will approach $50, sealed when California approves licenses – the most likely next state to do so.
Maximum downside risk is 20% to $25, where the stock floated after the deal was announced.
Upside opportunity is at least $65. As more and more states open, and Amaya consolidates its gorilla market position, it should be closer to $90.
I love this business. I love this opportunity. It’s a generational opportunity to earn at least three times your investment. I’m long.
Lawrence Meyers owns shares of Amaya.
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