Golden Nugget Online Gaming Is a Deeply Undervalued Play

Golden Nugget Online Gaming (NASDAQ:GNOG) is a deeply undervalued play in the fast-growing online gaming arena. Recently GNOG stock floated down after closing its SPAC (special purpose acquisition corp.) merger with Landcadia Holdings II on Dec. 30.

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The stock is down 23% year-to-date and 27% in the past month. However, GNOG stock is worth significantly more than its present price. I estimate its value is at least $36.16, or 140% above today’s price of $15.04.

There is one major reason why the stock has had some weakness lately. This is because Golden Nugget Online Gaming issued on Feb. 4 a notice of redemption for its public warrants. Warrant owners have until March 8 to exercise their warrants to purchase GNOG stock at $11.50 per share.

There are 5.88333 million public warrants and 10.541 million private warrants (16.425 million in total). This represents 44.4% of the Class A shares outstanding. I suspect that a very large percentage of those holdings the warrants are exercising them and then subsequently selling the Class A shares in the market. This has put an undue amount of pressure on the stock.

In effect, this is a temporary debasement of GNOG stock that will lift once the selling pressure subsides. It will also lift when the market realizes how valuable the company really is.

Golden Nugget Online Gaming Valuation

I have carefully reviewed the most recent prospectus and the warrant redemption notice. Based on my calculations GNOG stock will have 84.75795 million Class A and Class B shares outstanding. That gives it a public market value of $1.436 billion.

However, 37% of the total shares are Class B shares that Tillman Fertitta, the CEO controls, which have no economic rights and 10 votes per share. Once he converts them to Class A shares he gives up the nine extra voting rights but gains economic rights.

Therefore, we have to include them in the total even though only 63% of the market cap is public (the Class A shares). In other words, the actual float is only $960 million.

Now the warrants when exercised will bring $188.89 million to GNOG’s coffers. This is on top of the existing $88 million in cash, which the company’s slide presentation says on page 5 the company had. Therefore, since Golden Nugget also has $150 million in debt, the total net cash is 126.9 million. Its new enterprise value (EV) is $1.308 billion.

Based on the company’s projections for 2020 which were recently announced on Feb. 8, GNOG stock trades at 14.5x estimated sales. For example, its EV of $1.3 billion divided by its forecast $90.5 million in sales for 2020 is 14.5x.

Based on my model on Golden Nugget, I estimate its 2021 revenue will be $133.5 million. This includes some revenue from its recent entry into Michigan along with New Jersey. My model puts GNOG stock at just 9.8x 2021 sales. This is way too cheap.

What GNOG Stock Is Worth

Draft Kings (NASDAQ:DKNG) is another online gaming and sports betting stock that has a much higher valuation. It has a $22.8 billion market value and $865 million in 2021 forecast sales. As it has $1.14 billion in net cash, as of Sept. 30, its EV is $21.66 billion. Therefore, its EV-sales multiple is 25x (i.e., $21. 66 billion divided by $865 million).

We can value GNOG stock with a 22x multiple (slightly lower since it has less sports betting revenue and more iGaming revenue). Therefore, this implies an EV of $2.938 billion (i.e., 22 x $133.5 million in forecast 2021 sales).

After adding back the net cash of $126.9 million, the target market value is $3.065 billion. However, now there are more shares outstanding with the warrants exercised (84.75795 million shares), the target price is $36.16 per share. That represents a potential gain of 140% from today’s price.

For most investors that represents a great return. Even if it takes two years for the stock to reach that price, the average annual gain would be 45.37% each year on a compound basis.

On the date of publication, Mark R. Hake does not hold a long or short position in any stock or security mentioned in this article.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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