An article from Harvard Law School Forum notes that since the beginning of fiscal year 2016, “each year has set a record in terms of total number of SPAC IPOs and the amount of capital raised.” Besides companies raising funds, investors have benefited with SPACs bringing forward attractive new businesses. I believe that Landcadia Holdings II (NASDAQ:LCA) is yet another SPAC that’s worth considering.
Landcadia Holdings touched a high of $19.3 and has subsequently corrected to $15. Investors can accumulate the stock on declines. The company’s acquisition of Golden Nugget Online Gaming will likely deliver value.
Back in April 2020, a research by BonusFinder indicated that land-based closure has sparked a 100% rise in U.S. online casino searches. The article also noted that “the five states that have opened igaming are seeing month-on-month revenue rises with New Jersey leading the way.” As a matter of fact, Golden Nugget Online Gaming is a well-established player in New Jersey.
In the coming quarters, more states will open doors to online gaming. This will give Golden Nugget and other online players ample scope for market expansion. The online gambling market in the U.S. is expected to reach $94.37 billion by FY2025 from $47.57 billion in FY2018. At the same time, the global online gambling market is expected to be worth $127.3 billion by FY2027.
This presents a big opportunity for an early growth stage company in this area and I am bullish.
Golden Nugget Has Been Growing Fast
Even before the pandemic driven acceleration in online gaming, Golden Nugget has been growing at a robust pace. The company’s revenue has increased from $18.2 million in FY2016 to $55.4 million in the last year. For the current year, the company is on-track to deliver revenue of $86 million. At the same time, the company has been consistently delivering positive adjusted EBITDA.
The company also has an optimistic guidance with FY2021 revenue expectation of $122 million. By FY2025, revenue is expected to reach $635 million. I believe that the guidance is achievable considering the following factors:
- In the last five years, the company has lunched 60 exclusive games, which has driven player acquisition and revenue growth. For the remainder of this year and for the coming year, the company expects to launch 80 exclusive games. With an aggressive line-up of games, revenue growth is likely to follow.
- The company has a strong customer retention. In the last year, 50% of the gross gaming revenue (GGR) came from cohorts acquired before FY2018. As customer acquisition increases, the company will have a growing cash flow visibility just due to the client retention factor.
- The online gaming regulation is live in five states in the U.S. However, more states are “showing urgency in expanding online gaming options.” With the IPO, there is financial flexibility to expand aggressively into new states. This will trigger top-line and EBITDA growth.
An important point to note in the financials is that the advertising spends as a percentage of GGR has declined over the years. During the same period, adjusted EBITDA as a percentage of GGR has increased. This is a positive trend in terms of long-term cash generation potential.
The Final Takeaway on LCA Stock
Landcadia Holdings faces competition from the likes of GAN Limited (NASDAQ:GAN) and DraftKings (NASDAQ:DKNG). However, the online gaming market is likely to grow at a CAGR of 10% in the coming years and markets can absorb several players.
It’s worth noting that on a monthly basis, the company reported adjusted EBITDA of $3 million for April 2020 as compared to $1.4 million for April 2019. The point I am making is that the pandemic has triggered strong online gaming growth. Even amid competition, the company is well positioned to benefit.
Overall, Landcadia Holdings is worth accumulating on declines. I believe that the stock has the potential to deliver multi-fold returns in the next few years.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
