Online Gambling: This Bet Keeps Looking Sweeter and Sweeter

Certain companies could cash in if it gets legalized

By Jim Woods, Editor-in-Chief, Successful ETF Investing, Stock Investor's Blueprint

There’s a change in the zeitgeist when it comes to online gambling, and at the forefront of that change is New Jersey Gov. Chris Christie.

Sure, he recently vetoed a bill that would allow gambling over the Internet in the state of New Jersey. But he did add that he would sign into law a new bill allowing the activity as long as certain amendments were made. Those amendments include, not surprisingly, a higher tax rate on online gaming revenues, which would give more revenue to the state.

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Here’s the money quote from Gov. Christie on the issue: “Now is the time for our state to move forward, again leading the way for the nation, by becoming one of the first states to permit Internet gaming.”

If New Jersey allows online gambling, it will join Delaware and Nevada as one of three states to do so. More importantly, the New Jersey stamp of approval is likely to lead to more states getting the go-ahead to permit citizens to wager their money via the Internet.

This push to legalize online gambling hasn’t gone unnoticed by Wall Street. In fact, gaming stocks saw a huge spike recently on the prospects of serving a greater number of online betters.

One company spearheading the online gaming push is Boyd Gaming (NYSE:BYD), owners and operators of the Borgata Hotel Casino & Spa in Atlantic City. The Borgata already has taken steps to test-drive the online gaming technology: offering guests the ability to place bets with their television remote controls. The hotel’s in-room video poker and slot gaming system is seen to provide data and expertise on how New Jersey lawmakers could structure rules that allow them to track online gaming practices.

Over the past two weeks, BYD shares have been on a rollercoaster. The stock climbed double-digits over the course of last week but — thanks to a Goldman Sachs downgrade — shares have come under heavy selling pressure this week, losing most of those gains. In a note to clients accompanying the BYD “Sell” rating, analysts Steven Kent and Afua Ahwoi wrote that Boyd is susceptible to competition because 77% of its business is in traditional, regional gaming markets.

Interestingly, the Goldman analysts also think that online gambling, “could ultimately be big,” although they cautioned that “it could take longer than expected to roll out and will be very competitive, with high promotional activity, which in turn could lead to lower-than-expected margins.”

Now, I don’t doubt there will be growing pains associated with any online gaming plans, but that growth is, in my view, a long-term positive for BYD shares — and that’s not the only gaming stock likely to benefit from another source of revenue.

Fellow Atlantic City casino operator Caesars Entertainment (NASDAQ:CZR) is also poised to profit from online gaming, as it has the infrastructure in place (gaming license, physical casino, expertise) to hit the virtual ground running. The anticipation of such a future boom caused CZR shares to skyrocket.

As of last Thursday, Feb. 7, CZR shares were trading at just over $8.50. A day later, the shares had soared to a Feb. 8 closing value just under $14. That’s a 64% spike in less than two trading sessions! Take a look:

Obviously, Wall Street liked the New Jersey news; the BYD and CZR price spikes prove it. But here again, these weren’t the only winners in the space. Online gaming site Zynga (NASDAQ:ZNGA) has seen its shares soar nearly 24% since Feb. 4, and a big part of that is the widespread acceptance that online gambling is an idea whose time has come.

For investors who like to monitor these kinds of trends, BYD, CZR and ZNGA all should be on your watch list. Other gaming stocks likely to do well once this idea becomes reality are game-makers like Bally Technologies (NYSE:BYI), International Game Technology (NYSE:IGT) and SHFL Entertainment (NASDAQ:SHFL). All make the devices that make gambling possible, so each could do well no matter which casino operator attracts the most online gamblers.

I suspect that given the extremely challenged state budgets in New Jersey (and just about every state in the union), we will continue to see a push toward allowing online gaming as a way for government to acquire more spending cash. For investors, the fiscal challenges mean more gaming companies will be able to tap into a new source of strong revenue that will keep their bottom lines — as well as their stock prices — coming up aces.

As of this writing, Jim Woods held no position in any of the stocks mentioned.

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