Landcadia Isn’t Perfect, But It’s Worth a Roll of the Dice

Landcadia Holdings II (NASDAQ:LCA) is another of the stocks seeking to get in on the online-gaming gold rush. LCA stock got off to a hot start earlier this fall, as it hit $19 in September. Now, however, the shares are below $13. That’s not too shocking, as the whole online-gaming sector has been in a correction lately.

a room of slot machines in a casino to represent gambling stocks

Source: Shutterstock

Landcadia continues to make progress, however. Last Wednesday, the company announced that its upcoming merger with Golden Nugget is proceeding as planned. According to its press release, the merger will be finalized by the end of this month. Additionally, Golden Nugget reported its quarterly results, which showed near-triple digit year-over-year revenue growth. All of that could set the stage for a recovery by LCA stock going forward.

Landcadia Is Extremely Cheap Compared to Its Rivals

The most compelling argument for Golden Nugget is based purely on valuation. Compared to publicly-trading rivals like DraftKings (NASDAQ:DKNG) and Penn National Gaming (NASDAQ:PENN), LCA stock is the cheapest of the bunch. In fact, Golden Nugget is selling for just nine times analysts’ average revenue outlook. That’s a very good price for a business whose revenue is climbing nearly 100% per year.

InvestorPlace columnist  Vince Martin highlighted a risk facing Golden Nugget. According to Martin. right now, New Jersey is a vital online gaming market. Additionally, Pennsylvania is expected to start permitting online gambling at the beginning of 2021.

Both these markets are near the famous Golden Nugget casino in Atlantic City. Thus, Golden Nugget’s online division has a big built-in branding advantage in those markets that won’t be replicated as other, faraway states legalize online gambling.

The good news, though, is that Golden Nugget’s New Jersey operations alone make it profitable. Thus, it may have more money to devote to advertising and marketing in other regions than some believe.

It’s true that Golden Nugget doesn’t have a huge national advertising presence like DraftKings (NASDAQ:DKNG) or a charismatic figure leading its operations like Penn National’s (NASDAQ:PENN) Dave Portnoy. However, Golden Nugget already is large enough to be able to compete with its bigger rivals.

Online Gaming Is Not a Bubble Like Cannabis

The argument about the relative valuation of Golden Nugget is a solid one. On the other hand, it’s worth at least mentioning the bears’ other main point; they argue that all of the sports-gaming stocks are overpriced right now. In that environment, they say that LCA stock may be cheap compared to its peers, but that doesn’t necessarily mean that the shares will rise.

Think back to how marijuana stocks were rallying two years ago.  It was extremely difficult to make money by buying and holding marijuana stocks in 2018 simply because the whole sector was a bubble at the time.

I don’t think sports betting is in the same place now as marijuana was then, though. Companies have to overcome more regulatory hurdles to launch online-gaming businesses than grow marijuana. Furthermore, Golden Nugget is already generating profits in New Jersey. That’s a far cry from cannabis, where almost all the major players have lost significant amounts of money since they were launched.

The Verdict on LCA Stock

I don’t love Landcadia’s background. Special purpose acquisition companies (SPACs) in general require much more due diligence than regular initial public offerings (IPOs). And the dealings with related parties by Tilman Fertitta, Lancadia’s backer and Golden Nugget’s owner,  give me further pause. It’s simply not standard practice for a businessperson to sell an asset back to themselves via a SPAC in this way. It’s really not great governance.

That said, there’s a lot of unusual behavior going on in the world of SPACs this year. Fertitta’s actions, while not customary, make sense in light of the pandemic that left his hospitality and gaming empire short of cash earlier this year.

But the stock’s valuation is arguably attractive. As Martin argued, the discount may be justified given the company’s lackluster positioning in most of the country.

But until recently, investors were bidding up the gaming names first and asking questions later. As a result, there’s a good chance that LCA stock will get back on a winning streak as soon as the gaming companies catch fire again.

Landcadia is far from the perfect investment. But at this price, its  stock is worth betting on for the next few months at least.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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