With states from coast to coast legalizing online gambling, there’s big opportunity in this space. But, despite being in a red-hot sector, there’s no reason to dive into Lancadia Holdings (NASDAQ:LCA) stock right now.
The SPAC (special purpose acquistion company) will soon acquire Golden Nugget Online Gaming (GNOG), and assume its name. Sure, similar online gambling SPAC deals have taken off like rockets so far this year. But, I wouldn’t expect the same kind of “knock it out of the park” performance for Landcadia.
First, this SPAC deal isn’t about taking a high-growth company public. It’s about a billionaire looking to cash in on today’s SPAC gold rush. Why? To save his over-leveraged hospitality empire. Second, compared to other online gambling plays, you can call this company an “also-ran.” Other online gambling companies have the size and scale to dominate the market. This player? Not so much.
Third, if and when the recent enthusiasm for online gambling stocks takes a breather, Landcadia doesn’t have much to fall back on. Instead, shares could see an even greater decline relative to its publicly traded peers.
Red-hot growth plays that investors aren’t paying much attention to are usually the type of stocks I love most, but LCA doesn’t have that same appeal. When you put it all together, it’s clear that while it’s in a hot sector, this is a stock to avoid.
Billionare Bailout and LCA Stock
As I wrote earlier this month, Lancadia is just a marketing trap. There are many reasons why this isn’t a solid online gambling play. But, a key reason is the rationale behind the SPAC deal. Instead of being a high-growth company looking to tap into the public markets, it’s more about a billionaire using financial engineering to shore up his empire.
The billionaire? Tilman Fertitta. The hospitality mogul made his billions borrowing big to acquire restaurant chains and casinos. However, with the novel coroanvirus pandemic, he got himself into a bit of a cash crunch.
Earlier this year, Fertitta’s vehicle, Landry’s Inc, borrowed $300 million at double-digit interest rates. But, Tilman has found an easy way to pay off this high-interest rate loan. How? By selling the online gambling segment (Golden Nugget Online) to Landcadia. His Fertitta Entertainment co-sponsored the SPAC last year with Jefferies Financial Group (NYSE:JEF). Jefferies also happens to be the investment bank that underwrote the $300 million debt offering.
See what I’m getting out here? Landry’s may have been hard-hit by the pandemic. But, the online gambling mega trend has made one part of Fertitta’s empire much more valuable. Striking while the iron is hot, the billionaire can get himself out of the hole. Not only is this SPAC paying off/assuming the $300 million loan, but Fertitta Entertainment is getting a $30 million fee for the transaction!
But the questionable motivations aren’t the sole reason why it’s wise to avoid LCA stock. This online gambling company’s potential relative to rivals is another major concern.
In a Field of Front-Runners, Don’t Go With the ‘Also-Ran’
There are many ways to play the online gambling mega trend. Why throw your chips on this “also-ran?” Sure, GNOG has posted some strong numbers as of late. Revenues grew almost 85% year-over-year in second quarter 2020.
Yet, GNOG so far is only in the crowded New Jersey online betting market. Granted, it’s expanding into Pennsylvania and Michigan. But again, it has no first-mover advantage in this highly crowded industry. It’s not like the kinds of stocks I recommend in my Investment Opportunities, which are all bound for long-term success as leaders in key revolutions.
With greater size and scale, GNOG’s competitors have a stronger shot at dominating the U.S. online gambling market. Add in the millions in debt GNOG is assuming from its current parent, and you can say it’s behind the eight-ball.
Sure, this may not as big a deal right now. As investors continue to be excited about online gambling’s prospects, this stock could hold up its value (around $16 per share). Or, perhaps head even higher in the near-term.
But, if and when investor enthusiasm takes a breather, expect this name to fall harder than its peers. How so? With less to fall back on, shares could easily tumble back to their offering price (around $10 per share).
This Sector’s a Winner, But Landcadia Isn’t a Winning Opportunity
I remain bullish on the online gambling sector as a whole. With many more states that have yet to legalize online casinos/sportsbooks, there’s plenty of runway. But, as its first-mover rivals scoop up market share, Golden Nugget Online Gaming could be left in the dust.
And that’s not all it’ll be left with. Add in the millions in debt courtesy of Tilman Fertitta, and this “also-ran” will have additional hurdles as well.
There’s plenty of opportunity in this space — just not with LCA stock. Steer clear of this name for now, and consider the other online gambling plays out there.
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On the date of publication, Neither Matthew McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.