Special purpose acquisition companies (SPAC) had a banner year in 2020, and are poised to do the same in 2021. According to Bloomberg data, SPAC listings closed approximately $26 billion of share sales in January, exceeding the previous monthly record set in October 2020. There is certainly a lot of enthusiasm surrounding the space, but also a fair level of skepticism. That’s one of the principal reasons why Golden Nugget Online Gaming (NASDAQ:GNOG) stock is down 16.4% in the last month.
GNOG is only the second pure-play online gaming company. It’s an enviable position. Land-based casinos are still hurting due to the novel coronavirus pandemic. Although vaccines are rolling out, it will take time for the industry to get back on its feet. iGaming and esports are attractive alternatives that are gaining steam.
The U.S. legal sports betting market is expected to produce $7 billion to $8 billion in annual revenue by 2025. Against this backdrop, online betting platforms reached a record 20% of overall gambling revenue in 2020.
No surprises GNOG’s revenues increased nearly 63% year-over-year last year. According to preliminary estimates, operating income climbed to between $23 million and $24 million in the year, comparing quite favorably to the $17.6 million in 2019, a roughly 38% rise.
But with so much going for the company, momentum has surprisingly been absent for GNOG stock. Year to date, shares are down 14%. Its more famous compatriot DraftKings (NASDAQ:DKNG) is up 24.1% during the same period. Even though DraftKings is a more mature company, considering its preeminent place in the industry. For all these reasons and more, GNOG stock is an excellent way to play the online betting market.
GNOG Stock: A Cheaper DraftKings
Golden Nugget Online Gaming is a reverse merger between online gaming and casino company Golden Nugget and Lancadia Holdings II. The deal was estimated at a pro forma enterprise value of around $745 million, or 6.1 times the estimated 2021 revenue of $122 million. Despite the pre-merger hype, shares have dropped sharply from their 52-week high of $26 per share, and they closed at only $18 last Friday.
It’s a strange reaction to a company that has done so much right since going public. The company focuses on the New Jersey iGaming business and also has market access in Michigan, Pennsylvania. According to the company’s own estimates, its total addressable market stands at $22 billion, out of which the goal is to capture 10%. And it’s certainly not ambitious. It’s already raking in nearly 13% of the $800 million New Jersey iGaming market. Since it’s only the second online betting pure play, 10% is not a tall task by any stretch.
Despite all this, GNOG has a $1.15 billion market cap versus DraftKings, which is $22.77 billion. There is a certain level of speculation built into the company’s shares but not at the level of DKNG.
DraftKings aims for $1 billion in annual earnings before interest, tax, depreciation, and amortization (EBITDA). However, that figure hinges on the widespread legalization of online sports betting. As InvestorPlace‘s Matt McCall said in his article on DKNG, “None of the four most populous states — California, Texas, Florida, and New York — have legalized online sports betting, which is the real moneymaker.”
Hence, the markets are willing to reward DKNG stock despite the obvious hurdles.
Get It While It’s Hot
GNOG has done everything right since going public. However, the lack of positive coverage and momentum is surprising. At the moment, only one analyst has initiated coverage on the stock. Benchmark analyst Mike Hickey rates GNOG stock a “buy,” with a $27 per share target, implying a 47.4% upside to the current price.
Its original 2021 revenue target was $122 million. It already earns upwards of $100 million from the New Jersey market alone. Moving forward, Michigan and Pennsylvania will provide high-growth areas that the company can exploit. The recent license deals in Illinois and West Virginia only add fuel to the fire. With the explosion in online betting revenues, its 2025 revenue target of $635 million is pretty conservative and will be reached soon rather than later.
The bottom line is that online betting stocks are on the move. Due to Covid-19, online sports betting is on a roll, translating to massive gains for stocks exposed to this sector. No such luck when it comes to GNOG stock, but that gives you an attractive entry point to buy into a high-growth industry.
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.