Special purpose acquisition companies (SPACs) have provided some attractive investment opportunities. Golden Nugget Online Gaming (NASDAQ:GNOG) stock is another name that’s worth considering. GNOG stock currently trades around $18.50 and I believe that the stock could double in the next year. Let’s talk about the company’s business and stock upside triggers.
Golden Nugget is a provider of online gaming in the United States. The company is focused on online casino and sports betting. For the first nine months of fiscal year 2020, the company reported revenue of $68.1 million, which was higher by 71% on a year-on-year basis.
Talking about the industry tailwinds, the global online gambling market is expected to be worth $127.3 billion in FY2027. Specific to the United States, a study suggests that “39% of adult Americans (100 million people) are either current or potential sports bettors.”
With more states legalizing sports betting, the market inflection point is just around the corner. Recently, Michigan online sports betting and iGaming went live with “ten authorized operators launching right from start.”
Therefore, Golden Nugget does face competition from the likes of DraftKings (NASDAQ:DKNG) and GAN Limited (NASDAQ:GAN), among others. However, the market will be big enough in the coming years to absorb several players.
Stellar Growth Will Drive GNOG Stock Upside
I mentioned earlier that Golden Nugget delivered 71% revenue growth for year-to-date FY2020. I believe that strong top-line growth will sustain in the coming years. Several triggers are likely to ensure that top-line growth remains stellar.
For example, President Joe Biden has signaled support for online gaming. In the next 12-24 months, it’s likely that online gambling and sports betting will be legalized throughout the country, providing a new source of revenue for cash-strapped states. As new markets open-up, revenue growth is likely to accelerate.
Plus, Golden Nugget Online Gaming continues to diversify. The company has a strong pipeline of new and exclusive games. As of reporting in June 2020, the company planned to launch 80 new games between 2020-21. New content is likely to deliver incremental top-line growth.
To back my view, the company’s average revenue per user (ARPU) has increased from $480 in FY2016 to $624 in FY2020. With growth in users coupled with higher ARPU, the company is positioned to deliver strong numbers.
I want to add that the company has a loyal customer base. For FY2019, 50% of the company’s gross gaming revenue was generated from cohorts acquired before FY2018.
In addition to these factors, it’s worth noting that the company reported operating cash flow of $24.4 million for YTD FY2020. This implies an annualized OCF of $33 million. If top-line growth remains strong coupled with growth in ARPU, I expect the business to be a cash flow machine.
Concluding Views on Golden Nugget
On a proforma basis, the company does have outstanding debt of $150 million. However, that’s not a concern given that the company is already delivering positive cash flows, and its OCF can increase significantly in the next few years.
For the current year, Golden Nugget Online Gaming has guided for revenue of $122 million. With new game launches coupled with expansion in new states, the company is expecting revenue to surge to $635 million by FY2025.
These are not unrealistic projections. The best part of growth is still to come for the online casino and sports betting market. Therefore, considering a long-term investment horizon, GNOG stock has meaningful upside potential.
Overall, GNOG stock is attractive at $18.5. If we look at analyst recommendations, the company has a buy rating with a price target of $27. This would imply a potential upside of 46% from current levels. I am more optimistic. I see the stock doubling within the next 12-months.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
