Landcadia Holdings II (NASDAQ:LCA) is capitalizing on two prominent themes: Excitement surrounding special purpose acquisition companies (SPACs) and ebullience toward the online gaming space. Those factors pushed LCA stock higher to tune of 75.17% over the past 90 days.
For those not familiar with Landcadia, it’s a blank check company controlled by Houston Rockets owner Tilman Fertitta. He is well-known throughout the leisure and hospitality industry from ownership of Maestro’s Steakhouse and Golden Nugget casinos, among other entities. The Golden Nugget relationship is relevant because Landcadia announced the acquisition of Golden Nugget Online Gaming in June. LCA stock will convert to Golden Nugget Online Gaming, which is slated to trade on the NASDAQ under the ticker GNOG.
That transaction, which could be completed sometime this quarter, values the online gaming company at $745 million on a pro forma enterprise value basis. This is 6.1 times its expected 2021 revenue of $122 million. The SPAC also will assume $150 million in GNOG debt. This move is leading to some concerns about how the internet casino outfit will perform when it hits public markets.
What Matters with LCA Stock
As of early August, annual records for SPAC initial public offerings in terms of both volume and cash raised were shattered. This method of a company becoming a publicly traded entity is receiving renewed attention and scrutiny. It has fostered some heavily followed names, such as Nikola (NASDAQ:NKLA) and Virgin Galactic (NYSE:SPCE).
The gaming space is proving to be fertile territory for blank check deals. There several other companies in the que that could come public after GNOG. In large part, investors’ enthusiasm for gaming/SPAC relationships stems from DraftKings (NASDAQ:DKNG). This is a stock that’s more than tripled since its late April public debut following a reverse merger with a blank check firm.
All that enthusiasm is understandable. But current owners of LCA stock or those waiting for it turn to GNOG shouldn’t be rushing to make comparisons with other blank check transactions. What’s important right now with Golden Nugget Online is where iGaming is legal, the company’s ability to gain share in those markets and the political outlook for further legalization of online casinos.
Currently, just a handful of states permit internet casinos, with New Jersey and Pennsylvania being the dominant markets. Data confirm that the novel coronavirus pandemic was a boon for companies with online exposure.
Consider this: In the June quarter in New Jersey, every land-based gaming venue in Atlantic City lost money because those venues weren’t operational. The only casino in the state to turn a profit in the second quarter? You guessed it. Golden Nugget Online. Undoubtedly, that’s a feather in the cap of the company because, in the Garden State, the Golden Nugget lacks the brand cache of, say, Caesars Palace.
Expansion Could Drive the Stock
In the online gaming and sports betting spaces, New Jersey is the big Kahuna. And while that’s a plus for operators that already have exposure to the state, it also means these companies need to expand elsewhere. Fighting for the same gamblers’ dollars in a single state isn’t a tangible long-term business model.
To that end, GNOG recently inked a deal to enter Michigan. Also, the company expects it will join the fast-growing Pennsylvania market early next year.
Expansion prospects after those three states aren’t definitive at the moment. The typical strategy for companies like GNOG is to seek licenses in each state that approves iGaming. And, it’s reasonable GNOG will follow suit.
Investors looking for a catalyst on this front may not have to wait long as the Covid-19 pandemic depletes state coffers. At least 10 states are considering iGaming or sports betting legislation or putting related ballot questions before voters in November. The more affirmative votes on these issues, the more potential upside awaits LCA stock.
On the date of publication, Todd Shriber is long DKNG.
Todd Shriber has been an InvestorPlace contributor since 2014.