One of the new traditions suddenly in vogue is debuting on the exchanges via blank check companies. Electric vehicle (EV) companies are using this practice the most. But the merger of Landcadia Holdings II (NASDAQ:LCA) and Golden Nugget Online Gaming brings this tradition to the world of sports betting, and led to a spike in LCA stock.
Although there is a lot of anticipation surrounding the merger, I am a bit skeptical. According to a recent study, the online gambling market will be worth $160 billion by the end of 2026.
LCA stock is a cheap way to play this trend, considering DraftKings (NASDAQ:DKNG) is trading 34.17 times forward enterprise value-to-sales.
However, comparisons to DraftKings are a bit far fetched at this stage. A preeminent brand in sports betting, DraftKings has several top-tier partnerships that are a cut above the rest. The packed sports calendar for fall/winter will drive demand higher, and it stands to benefit the most from additional legalization.
Another troubling matter for LCA stock is billionaire investor Tilman Fertitta, who will serve as the combined entity’s CEO. He is facing headwinds due to a highly leveraged balance sheet.
Many of my colleagues believe the SPAC deal help lessen the pressure caused by the novel coronavirus pandemic. That makes for a weak long term story for LCA stock. But expect shares to keep popping due to short term catalysts.
A Tale of Two Pure Plays
DraftKings and Golden Nugget Online Gaming are the only two pure-plays when it comes to online gaming. iGaming players place more bets and more states are expected to legalize online gambling, leading to a substantially bigger market than traditional gaming.
Besides, Covid-19 has forced millions of people into their homes. Since you cannot go to the local casino to play slots, the only option for players is to go online.
That’s why the industry has a lot of momentum heading into 2021. DraftKings just had a stellar quarter reflecting this reality, going from a 10% year on year revenue fall in Q2 to 42% revenue growth and 64% user growth in Q3.
If anyone is squeamish regarding the multiples at which the stock is trading, 37.66 times forward price-to-earnings as of this writing, then they shouldn’t be.
Outsized valuations are expected. Especially since it’s a one-horse race at this point. Analysts forecast 2021 to be a bumper year for the company, with revenue growth of 54.58% and EPS growth of 41.73%. So, even though valuations seem extreme, there is merit to them.
Texas billionaire Tilman Fertitta has a vast business empire encompassing everything from restaurants to casinos. After the Covid-19 pandemic brought the travel and leisure industry to a near standstill, he lost a third of his net worth, 40,000 of his employees are furloughed, and many of his restaurants are still shuttered and burning through cash.
Every major business exposed to hospitality and entertainment is struggling. But Fertitta’s business is especially in trouble. His holding company, Golden Nugget, is saddled with nearly $5 billion of junk-rated debt.
“I have enough liquidity to ride this out,” the billionaire said in March. “I can’t go forever, but I can go for a few months.”
In April, he offered an interest rate of at least 15% for a new $250 million loan for his Golden Nugget casinos and hundreds of restaurants under the Landry’s Inc. umbrella. More debt to keep his casino and restaurant empire afloat if the Covid-19 shutdown persists.
Let me be clear. There isn’t anything to suggest as of yet that the SPAC deal is illegal. But you can understand why investors are squeamish. Anyone looking from the outside will be tempted to see the agreement as a lifeline to the Texas billionaire rather than a solid investment.
How to Play LCA Stock?
I understand the allure of LCA stock. It’s of only two options to play the online gaming market. Several short term catalysts will continue to push shares higher. That happens with spec plays that are highly sensitive to news.
Hence, progressively, expect intermittent spikes. The SEC has yet to approve the merger, boards will vote on the combination, shares will trade under the ticker “GNOG,” just a sampling of what’s to happen. Shares gained 5.30% in post-market action when the New Jersey Casino Control Commission approved the merger.
But I agree with many of my colleagues. LCA stock comes with a lot of inherent risks. If you are a day trader with an ear to the ground, profits are there for the taking. If you are a dedicated dividend investor that wants long-term stability, then it’s best to hold off on buying in right now.
Unless you want to rescue a billionaire in trouble.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.