Raise Your Bets on Online Poker With Amaya Gaming (AMYGF)

A few months ago, I wrote about the huge acquisition by Canadian company Amaya Inc (OTCMKTS:AMYGF). Amaya trades on the Toronto Stock Exchange, but you can also purchase AMYGF stock here on the Over-The-Counter Bulletin Board, as I have done.

amaya gaming amygf stockAmaya Gaming pulled together a huge chunk of private equity and debt to purchase PokerStars and Full Tilt Poker — two of the largest brand names in online poker — last summer. The $4.5 billion deal by Amaya had several objectives.

The first objective was to seize control of PokerStars and Full Tilt Poker, which still had enormous cash flow from non-U.S. operations. Online poker remains big in many parts of the world, even after being effectively banned by the U.S

Amaya purchased the names because it saw a strong possibility that online poker would be permitted in the U.S. again on a state-by-state basis, in the coming years. That would take an operation that was already generating nice cash flow and make it a juggernaut.

As it is, the PokerStars name has 66% market share in online poker, up from 62% last year.

Another objective was to introduce sports betting and casino games on these same platforms to make them even more profitable. Amaya Gaming provided an update on its business earlier this month, and its objectives are moving along nicely.

Revenues from its PokerStars and FullTilt brands came in at $340 million. Offsetting the revenue was $59 million in advertising expenses, $194 million in G&A, and $66 million in interest. Net income from continuing operations thus came in at about $23 million, with about $50 million in operational cash flow.

I expect these expenses to remain relatively high until the poker platforms regain their footholds in the U.S. Nevertheless, even at these high rates, I’m happy with 15% Ebitda margins.

Growth in poker revenue was 8% on a constant currency basis, and real money signups increased 2%. Plus, reactivation of inactive players increased 5%, and 94% of revenue came from poker, with 6% coming from the new casino offerings.

In other news, the PokerStars Sportsbook launched in beta at the end of Q1, FullTilt is now licensed in Denmark. Both brands just got approved for the UK, which will be huge.

It’s the full year guidance that I find particularly exciting. Amaya Gaming expects about $1.5 billion in revenue and $625 million in Ebitda, with net income between $367 and $415 million. If Amaya Gaming hits the middle of that range, or around $391 million, that means it is presently trading at 13 times earnings.

I think that valuation is fair and probably undervalued if Amaya breaks into the U.S. On that front, the Amaya Gaming CEO has provided strong indication that PokerStars will return to the U.S., in the state of New Jersey, later this year. It only takes one state to acknowledge that online poker is a real thing again, before others follow suit. In my mind, that means Nevada comes next, then California.

There’s another development — AMYGF sold off some of its other assets for more than $400 million in cash earlier this year. It seems those proceeds are going to be used to go in on a partnership with some other firms to purchase the parent company of PartyPoker.

As far as I’m concerned, this is the early stage of a very profitable story. Many headwinds remain, of course — Amaya may never be allowed into the U.S. Still, the cash flow it generates makes it a AMYGF long-term play.

Lawrence Meyers owns shares of Amaya.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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