Previously, I’ve taken a bearish view on Landcadia Holdings II (NASDAQ:LCA) stock. Namely, due to the potential motivations behind this SPAC’s (blank-check company) pending deal with rising iGaming star Golden Nugget Online Gaming (GNON).
Simply put, the principal behind both sides of the deal looks like the clear winner at the expense of public shareholders. Yet, don’t let this potential red flag distract you from this stock’s ample potential long-term gains.
Why? Sure, this isn’t exactly a “value stock” at today’s valuation. But, as iGaming trends are set to continue, shares today may look like a steal in hindsight.
Sure, this gamble of a gambling stock is far from a “lock.” Extrapolating GNON’s strong results in New Jersey in recent months, it seems like this company will become a cash cow in a matter of years. But, the jury’s still out whether it can attain similar levels of success as it expands into other U.S. states.
In short, this isn’t yet a name you should go out and buy, hand-over-fist. But, as iGaming accelerates, it’s still worthwhile to enter a small position at today’s prices (around $13 per share).
LCA Stock, iGaming Expansion, and What’s Next
But, while both, along with others like Flutter Entertainment (OTCMKTS:PDYPY), Caesars (NASDAQ:CZR), and MGM (NYSE:MGM) remain focused on the sportsbook segment, Landcadia’s merger partner GNON may be barking up the right tree going after the online casino, or iGaming, market.
With this in mind, it’s no shock that upstart GNON already posts positive operating income. But, while this is a factor in favor of LCA stock, are recent results reflective of what’s to come? It’s possible, but it’s no slam dunk.
How so? Golden Nugget’s success as of late may be due to more than just the strong equity its brand has in New Jersey. Pandemic tailwinds may be playing a role as well. This could mean growth slows if and when the pandemic subsides, as more gamblers feel safe to hit the real-life slots and tables.
Also, it’s still debatable whether the company will continue “crushing it” as it enters other states. With big money to be made in online casinos, competition from the more established names may mean a more elusive path to profits compared to the company’s fast success in the Garden State.
Yet, focusing on this and other concerns may make you miss the forest for the trees. Weighing near-term issues against long-term potential, the risk/return proposition is firmly in your favor.
Risks Still on the Table, But Nothing to Split Hairs Over
As mentioned, a major issue is the fact the company’s principal (hospitality billionaire Tillman Fertitta) is on both sides of the pending SPAC deal. On paper, it looks as if Fertitta is looking to have his cake, and eat it too. By selling debt-laden GNON to Landcadia, not only is he able to shed some debt he took on due to the novel coronavirus impacting his empire, hard-hit by social distancing and lockdowns. Companies controlled by Fertitta are also clearing a $30 million transaction fee for the deal!
Yes, this looks like a slam dunk for the Houston Rockets owner. But, that doesn’t mean investors are getting taken for a ride. Since this company is much smaller than other online gaming plays, we may see some hiccups along the way.
But, even when you factor future dilution from equity raises, the long-term potential remains massive. As InvestorPlace Markets Analyst Luke Lango discussed in his October deep dive on LCA stock, iGaming could eventually become a $20 billion segment within a $100 billion per year U.S. gaming industry.
This could be profits in the hundreds of millions per year. Keep in mind the pro-forma valuation for the combined LCA-GNON is well below $1 billion. In short, the company will only need to capture a sliver of the overall market share to make today’s valuation look dirt cheap in hindsight.
Tread Carefully, But the Odds are in Your Favor Here
While there’s runway for massive long-term gains in Landcadia (soon to be GNON) stock, don’t bet the ranch. Until we see how its expansion into states like Michigan plays out, we are still in the dark whether this online gaming “also ran” could morph into a powerhouse by the end of the decade.
That being said, the odds are in your favor with high-risk, high potential return LCA stock. Consider shares a buy at today’s prices.
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, a contributor to InvestorPlace, has written single stock analysis since 2016.