As previously noted by InvestorPlace analyst Matt McCall, Landcadia Holdings II (NASDAQ:LCA) has agreed to merge with Golden Nugget’s online gambling unit, Golden Nugget Online Gaming or GNOG. As a consequence, investors who buy LCA stock at this point are essentially buying shares of GNOG.
Given the high level of competition in the sports-betting and the limitations of Golden Nugget, I recommend that investors avoid .
I agree with McCall’s thesis on LCA stock. Specifically, he wrote, “other online gambling companies have the size and scale to dominate the market. This player? Not so much.”
Online gaming will be lucrative and grow rapidly, but it’s not difficult or expensive for companies to enter the sector. As a result, tons of firms have or will enter the space, resulting in a great deal of competition for Golden Nugget.
The Golden Nugget and LCA Stock
The companies that succeed in the dog-eat-dog sector will either have access to tens of millions of online gamblers or tremendous amounts of cash that can be used to effectively market their platforms to online gamblers.
For example, Penn National (NASDAQ:PENN) can market its online gaming platform on Barstool, the media company which is quite popular with many millions of sports-betting fans.
In fact, in January 2020, before Barstool received tens of millions of dollars of free publicity during the novel coronavirus pandemic, the company reported having 66 million unique visitors in a single month.
Meanwhile, in August, internet giant IAC (NASDAQ:IAC) invested $1 billion in casino chain MGM Resorts (NYSE:MGM), Rest assured that MGM will use a large portion of those funds to market its online gaming platform.
In fact, IAC Chairman Barry Diller stated in the press release announcing the deal that MGM’s online gaming business was part of the reason that IAC carried out the transaction.
By contrast, as McCall pointed, Golden Nugget seems to be quite cash-strapped. Billionaire Tilman Fertitta, who owns Golden Nugget through his holding company, Landry, borrowed $300 million at high interest rates to survive the novel coronavirus pandemic.
So GNOG probably won’t make any major, expensive acquisitions that would give it access to many tens of millions of online gamblers. And given Fertitta’s cash-flow issues (Landry’s owns multiple restaurant chains), GNOG almost will definitely not invest hundreds of millions of dollars in marketing itself as MGM likely will.
GNOG may have data on a few million people who have visited its five casinos and/or gambled on its app in New Jersey, but many of these people probably enjoy gambling in person more than online.
Further, given the $550 million market capitalization of LCA stock and the eventual $745 million valuation of GNOG, the user base that GNOG could attract with such a list is not too impressive.
I’m also not awed by the Q2 results of GNOG’s New Jersey online gaming subsidiary. Despite the pandemic which kept so many Americans at home last quarter, the unit’s Q2 operating income came in at $8.5 million.
Even if its quarterly operating income doubles next year to around $17 million, which is unlikely considering the expensive marketing that the company will have to carry out, the valuation of its shares will not be especially attractive.
The Bottom Line on LCA
Given the tough competition that GNOG is likely to face, its lack of a large online user base, and its likely lack of access to the hundreds of millions of dollars that it will need to market itself, investors should avoid LCA stock.
Instead, given the very successful track record of IAC’s Diller and his very deep pockets, I recommend that investors seeking exposure to online gambling buy MGM stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.