Is Landcadia Holdings II (NASDAQ:LCA) stock the next DraftKings (NASDAQ:DKNG)? Not so fast! After seeing shares in sportsbook powerhouse skyrocket following its SPAC (special purpose acquistion company) merger, those who missed out may be jumping into this name for similar potential gains.
But, just because it quacks like a duck doesn’t mean it is a duck. That is to say, yes, Landcadia’s merger partner, Golden Nugget Online Gaming, or GNOG, is an online gambling company. Yet, its not in the same league as its larger rivals.
Not only that, the motivations behind this SPAC deal should give investors caution. With a cash-strapped billionaire the key player behind the scenes, do you really want to be buying what presumably the “smart money” is selling?
Granted, given the massive runway for this budding industry, even buying a weaker play like LCA stock could mean big gains. But, after rallying from $10 per share up to around $18 per share, there may not be much left in the tank.
So, what’s the call here? Those who bought in at lower prices should sell into strength. Otherwise, steer clear for now.
LCA Stock Is Different
With trends on its side, and high investor demand, it’s tough to be bearish about online gambling stocks. Yet, it’s important to keep in mind Landcadia is different from other plays in the sector.
Namely, the rise in legal sports betting isn’t the key catalyst here. That makes it differ from DraftKings, along with names like FanDuel (OTCMKTS:PDYPY) and Penn National (NASDAQ:PENN), which could quickly dominate the market with its Barstool Sportsbook app.
Instead, GNOG’s focus is on the online casino, or igaming, space. Yet, don’t take that difference to mean a negative. Based on its results out of New Jersey, the company could be “crushing it” in this segment of the overall online gambling space. And, planned expansions into Michigan and Pennsylvania could mean continued growth is in the cards.
Speaking of growth, calling this a “growth story” is an understatement. Last quarter, revenues soared 85% year-over-year . Operating income soared 74% from the prior year’s quarter.
Yet, that doesn’t guarantee another epic run in the stock from here.
As our own Todd Shriber wrote Sep 21, so far just a handful of states have internet casinos. Online sportsbook legalization is moving along much more rapidly. This could mean GNOG’s expansion prospects aren’t as high as investors today anticipate.
Also, given that legacy casino companies like MGM (NYSE:MGM) and Caesars (NASDAQ:CZR) have a size and scale advantage if they choose to fully jump into igaming, Golden Nugget could face competitive challenges as it tries to scale up.
But, beyond the underlying fundamentals of GNOG and its operating business, there’s another red flag to consider: why is this company merging with Landcadia, and who’s behind the deal?
Suspect Motivations for the Golden Nugget Deal
As our own Matt McCall detailed earlier this month, this upcoming deal could be little more than a billionaire bailout. How so? It’s important to note that the co-sponsor of this SPAC was Tillman Fertitta. Fertitta is a billionaire entrepreneur, whose holdings restaurant chains, the Golden Nugget casino business, as well as ownership of the Houston Rockets NBA team.
But, with the novel coronavirus decimating his empire, Fertitta faced a big cash crunch earlier this year. He borrowed $300 million at steep interest rates to keep his disparate businesses afloat. However, the hospitality impresario found an out from his troubles.
By selling his online gaming business (GNOG) to the SPAC he co-sponsored (Landcadia), not only can he pay off/take the remaining liabilities off his plate. The billionaire’s Fertitta Entertainment will receive a $30 million transaction fee!
That’s not to say investors are buying a lemon if they buy LCA stock. Yet, there should be some concern buying what presumably the “smart money” is selling. With this dynamic at play, there’s plenty of reason why this online gambling play is far from a sure thing.
Things Could Work Out, but Sell Into Strength for Now
Simply put, Landcadia is not the next DraftKings. But, it doesn’t have to be to produce outsized returns for investors. By focusing its efforts on its igaming niche, it could build a significant business, while the crowded sportsbook field gets more competitive.
Yet, that’s not to say it’s smooth sailing ahead for GNOG and LCA stock. Limited runway, and increased igaming competition, could sink shares as well. Add in a deal that may benefit a billionaire more so than rank-and-file shareholders, and it’s clear selling into the recent strength is the way to go. And those who haven’t bought in yet? Wait for a pullback before buying.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.