Golden Nugget Online Gaming (NASDAQ:GNOG) went public on Dec. 30, after merging with a SPAC (special purpose acquisition company) called Landcandia Holdings II. Based on my calculations, GNOG stock is worth considerably more, up to 65% more, based on a simple comparison with Draft Kings (NASDAQ:DKNG).
Keep in mind that Golden Nugget Online Gaming is not in any way related to Golden Nugget Casinos (based in Las Vegas and Laughlin).
That company is privately held by Tilman Fertitta. However, Fertitta’s interests do own about 52% of GNOG stock, but we don’t yet know the exact amount of shares for two reasons.
Golden Nugget Online Gaming Merger
First, it appears that Golden Nugget Online Gaming does not even have its own investor relations website yet. Its NJ gaming site does not have any information on the company as a public entity. Second, the company has not filed with the SEC its final share count information, nor have Fertitta’s interests filed.
Moreover, this deal was a little different than most SPAC mergers. There was no PIPE deal (private investment in public equity) with institutional investors. That is a great thing for the public investors since they now own about 46% of the GNOG stock. This is based on nothing more than page 5 of the company’s investor presentation from July.
It is also the reason why it took two shareholder meetings in December for the deal to close. Moreover, this is making the stock a bit more volatile than most other SPAC mergers. For example, it appears a lot of investors have been selling their shares in GNOG since the merger closed on Dec. 30.
Nevertheless, after carefully studying the company’s presentation and its Q3 earnings report, GNOG stock is worth considerably more than its present price. Here is why.
What Golden Nugget Online Gaming Is Worth
GNOG stock is trading for about 12 times its revenue on an enterprise value basis. But DKNG stock trades at about 19.5 times EV-to-sales.
Therefore, assuming both companies should have a similar or fairly similar valuation as the only two online gaming stocks, GNOG should move up in value. This implies that GNOG stock should trade about $33.92 per share or 65% above its price on Jan. 5 ($20.59).
Here is how I came up with this valuation calculation. First, the slide presentation from the original June 29 announcement indicates on page 5 that about 68.3 million shares will be outstanding. Therefore at today’s price, the market capitalization for GNOG stock is $1.406 billion.
Next, to derive the pro forma enterprise value, we need to add in the net debt after the merger closed. We won’t know the final numbers until its Q4 earnings release later this month. But the presentation indicates there will be $150 million in debt and $88 million in cash. That works to net debt of $62 million. Therefore, the enterprise value (EV) is $1.468 billion.
Now we can estimate the company’s pro forma 2021 enterprise value-to-sales ratio. Based on its presentation, again on page 5, Golden Nugget Online Gaming will make $122 million in sales during 2021. This also corresponds with its Q3 numbers where it made $25.9 million in net revenue. On a run-rate basis, that works out to $103.6 million. the 2021 estimate of $122 million in gaming sales assumes 17.7% growth during 2021.
As a result, we can derive the EV-to-sales ratio by dividing $1.468 billion (EV) by $122 million (2021 sales estimate). That works out to 12 times.
This is significantly below DraftKings’ EV-to-sale ratio. Based on my estimates their valuation is 19.5 EV-to-sales.
What to Do With GNOG Stock
Based on this information we can multiply 19.5 times the $122 million in 2021 sales. That gives GNOG stock a $2.379 billion EV. After subtracting the $62 million in net debt, the target market cap should be $2.317 billion. Now, since we know there are 68.3 million shares (see above), the price should be $33.92. This price is 65% above its $20.59 price on Jan. 5.
Moreover, GNOG is gaining a reputation as having some of the best “matching” deposit rates. Apparently, if you deposit $1,000, GNOG will match those amounts in matched play up to $20,000. This is going to make online gaming extremely popular in the states where it is approved.
Once the company announces its Q4 earnings, we will have more detailed financial information to value the stock. At that point, I believe it will become apparent how cheap GNOG stock is compared to DKNG stock. The arbitrage between the two stocks’ valuation will likely quickly close.
Moreover, Golden Nugget Online Gaming made it clear it wants to have access to capital by being public. Here is what that means on a practical basis. They are going to push up the stock before selling equity.
In effect, this was a very smart move by Fertitta. He did not follow the typical route of giving PIPE hedge funds a discount at $10 per share like most SPACs. By selling shares at a much higher price, there will be less dilution and a higher upside for GNOG shareholders.
So, if you believe my calculations, you now have an early insight into what will likely happen. The bottom line is GNOG stock is worth at least 65% more or $33.92 per share.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.