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Amaya Inc. (NASDAQ: AYA) reported earnings on Tuesday, and the stock shed more than a third of its value for absolutely no good reason.
I’m going to show you why. Then I’ll explain why Amaya stock is literally a generational opportunity to buy now that has at least 300% upside. No, I’m not kidding.
Amaya is a Canadian comany that made headlines last year when it purchased the online poker websites PokerStars and FullTilt for $4.9 billion. Online poker had been spiked by the U.S. government in 2011, and while these platforms were still operating overseas, Amaya had hopes that one day they might re-enter the U.S.
Subsequent to that, Amaya sold off its non-core assets and started ramping up its online casino and sportsbook offerings. As I’ve written before, online gaming is a cash cow. If Amaya can get back into the U.S., in addition to its overseas expansion and new products, its potential is gigantic.
What Hit Amaya Earnings
So what happened on Tuesday that spooked investors? Currency issues. As we know, both the U.S. dollar and Canadian dollar are very strong against the euro. Amaya management said that has chopped 19% off the purchasing power of its customer base. The result is an impact on revenues – to the tune of 13%. Amaya also said its stock will also see profits decline from a range of $1.76 – $2 a share to $1.66 to $1.75 a share.
To which I say, “So what?” Forex effects are a fact of life, and they happen in both directions. Every global company deals with it. For whatever negative effects are happening now, a positive will occur down the road. What matters is business when measured in constant currency. Amaya revenues were up 19% on that basis.
Even with forex issues, Amaya stock saw third-quarter revenue up to $325 million from $300 million, and earnings per share rise from $80 million to $91 million. The suspension of its operations in Portugal pending a government regime change cut $9 million off net income. The other piece of news that negatively impacted Amaya stock was the delay of its sportsbook rollout.
Yet there is nothing here that jeopardizes Amaya’s long-term prospects, and certainly does not justify lopping a billion dollars off its market cap. Moreover, Amaya received its golden ticket to enter the U.S. poker market in New Jersey at the end of September. It expects to roll out in the first half of 2016.
There are also movements to bring online gambling to Pennsylvania, Delaware, Nevada and California. These state governments are always strapped for cash, so the opportunity to tax gambling, which always brings in big money, is like throwing filet mignon to a dog.
Valuation and Opportunity
Let’s look at valuation, and see why this is an even more incredible opportunity than it was when I first discussed it.
After the acquisition last year, I said that rival PartyGaming had been valued at $8.5 billion based on $507 million in EBITDA (earnings before interest, taxes, depreciation and amortization), or 17.7 times cash flow. Amaya management has guided fiscal year 2015 EBITDA to $446 million, which is 11% less than what PartyGaming made. Thus, the fair value based on EBITDA alone would be $7.57 billion – almost 50% more than the original acquisition price!
That puts fair value on Amaya stock at $56. As I write, it trades at $15. None of the current EBITDA estimates even includes sportsbook revenue or New Jersey poker revenue.
There’s even more to like. Since the acquisition, Amaya’s balance sheet has improved. It sold off non-core assets and paid down $690 million of its debt, while also repurchasing $45.5 million worth of stock. The reduction in debt saves Amaya $62 million in interest. That’s what Amaya can do with all that EBITDA.
I see nothing to justify the sell-off to $15. I added to my long position, and suggest you do the same.
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