Debt-Heavy Golden Nugget Online Gaming Stock Could Be a Disaster Waiting to Happen

Holding steady at just over $20 per share, is now the take to make a wager on Golden Nugget Online Gaming (NASDAQ:GNOG)? It’s questionable. Sure, some big changes have happened in the past month, but GNOG stock still looks iffy.

poker chips and dice on top of a keyboard representing gambling stocks

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Formerly known as Landcadia Holdings II, this special purpose acquisition company (SPAC) closed on its merger with previously private-held Golden Nugget Online Gaming. But, while it’s taken on a new name, the opportunities and risks remain the same.

That is to say, there’s big potential for this iGaming company to scale up massively in the coming decade. I’m sure you are well aware of the online gambling megatrend. As cash-strapped states continue to legalize online gambling, this fast-growing sector could eventually generate as much as $20 billion in annual revenue.

So far, much of the attention for this megatrend has focused on sportsbook stocks. Think DraftKings (NASDAQ:DKNG), and Penn National (NASDAQ:PENN), the most high-profile plays out there. But, with higher expected profit margins, iGaming may be the most lucrative segment of this emerging industry.

However, this potential is more than reflected in its current share price. If the company hits some hiccups in the near-term, investors could get skittish. Putting it simply, it may not be worth it to enter a position now, as it trades near all-time highs.

The Bull and Bear Cases for GNOG Stock

As mentioned above, there’s good reason why investors are excited about Golden Nugget Online Gaming. It may not be the largest online gambling company out there. It may also lack the deep pockets of gaming industry giants like Caesars (NASDAQ:CZR) and MGM (NYSE:MGM). But this “also-ran” doesn’t need to dominate the market for GNOG stock to be a winner in the coming years.

As I wrote back in December, annual revenues could soar more than five-fold by 2025. And, there could even be more substantial potential runway than a surge from around $122 million to $635 million per year in annual sales.

If it plays its cards right, this company could generate $2 billion in annual sales by 2030, per estimates from our own Luke Lango. Considering that, at today’s prices, GNOG’s market capitalization is $1.4 billion, $20 per share could end up looking like a steal in hindsight.

But, as is the case with most growth stocks, it’s easy to focus too much on what’s possible, and not enough on what’s probable. Golden Nugget Online Gaming could scale into a massive iGaming powerhouse, but a lucrative future is far from guaranteed.

That brings us to the bear case. Putting it simply, shares at today’s prices imply the company’s expansion in other states will go off without a hitch. Although the company’s gross gaming revenue before excise taxes in New Jersey came in at $318.9 million for 2020 according to regulatory filings, “crushing it” in the Garden State isn’t enough.

GNOG will have to achieve similar levels of success in new markets like Michigan, Pennsylvania, and West Virginia. Whether it can remains to be seen, and there are other risks on the horizon. Diving in today may not be the best move.

Other Concerns to Keep in Mind

Along with the aforementioned uncertainties with its multi-state expansion, there are other risks on the table. InvestorPlace’s Will Ashworth highlighted a major one in his Jan. 19 article on GNOG stock.

The company has a frightening amount of outstanding debt.

This is the result of GNOG’s main principal (billionaire Tillman Fertitta) shifting $300 million in debt off of the books of his privately-held casino, restaurant, and sports team empire, and onto this company’s balance sheet. However, the majority of this debt has been paid off using some of this former SPAC’s IPO proceeds.

Another issue is one that has less to do with this company specifically, and more with online gambling stocks in general. Much as with EV stocks, online gambling stocks could be in the midst of a bubble. If this bubble pops in the coming months, names across the sector could fall sharply from current levels.

In short, brace for potential high volatility if you choose to buy GNOG stock at today’s prices. Last fall, shares tumbled from around $18 per share, to under $12 per share, as speculators bailed out of SPAC stocks. It’s easy to see a similar pullback happen again down the road.

Bottom Line: Tread Carefully

Over the long-term, Golden Nugget Online Gaming could live up to investors’ current sky-high expectations. Yet, with the aforementioned risks/uncertainties, coupled with prior price movements, there’s a big risk shares take a dive in the near-term before they continue to rise over the long term.

So, what’s the verdict with GNOG stock? Keep downside risk in mind before entering a position.

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.

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