Investors clearly are bullish toward online gambling stocks, as they should be. But I’m not convinced that optimism should extend to Landcadia Holdings II (NASDAQ:LCA) and LCA stock.
To be sure, LCA stock has an interesting case. The SPAC (special purpose acquisition company) is merging with Golden Nugget Online Gaming (GNOG). Golden Nugget is the leader in New Jersey’s iGaming market and has plans to expand into additional states as well.
But if you look closer, the case looks concerning. Golden Nugget’s name recognition doesn’t match that of most of its rivals. Those competitors will be fighting hard for every dollar in every market. Importantly, they will have more resources, even after the merger, than Golden Nugget likely will.
All told, with LCA stock up 70% since the merger, it seems time to cash out.
In the merger presentation from late June, Landcadia argued that Golden Nugget “has become a household name” in the U.S. Personally, I’m somewhat skeptical that’s true.
The company does have solid name recognition in some markets. Not coincidentally, one of those markets is New Jersey. The Golden Nugget in Atlantic City opened in 1985. The company also operates four casinos in Nevada (Las Vegas and Laughlin), Louisiana, and Mississippi.
But those properties are hardly at the high end of their markets. The Las Vegas property, for instance, is not on the Strip, but Downtown.
At the very least, it’s hard to argue that the Golden Nugget brand is at the top of the nationwide list in terms of reputation. And as iGaming expands nationwide, Golden Nugget will be competing with brands that are, whether those brands are owned by national casino operators or leaders in daily fantasy sports.
Competition and Resources
Those nationwide brands also will be pouring tens of millions of dollars into every market they enter. There will be free bets at sign-ups, contests, promotions, and rewards programs.
But GNOG, upon the close of the merger, expects to have less than $100 million in cash on hand. Much of the money coming from LCA shareholders actually is going to pay down debt.
The company isn’t going to go bankrupt, but going forward it won’t have the war chest that larger rivals will.
And that will matter. It’s going to be a race to attract customers early and often, because once iGaming customers are acquired, they become profitable very quickly and they tend to stick around. If rivals are spending more, they will have a key edge.
In newer markets, Golden Nugget’s brand will be weaker. The company will have some name recognition in Pennsylvania, which was a feeder market for Atlantic City before it legalized gambling in 2006. But in Michigan, the company likely starts from behind.
That’s doubly true because, at least for now, GNOG has no interest in going into online sports betting. But online sports betting operators are moving into iGaming (with some success in New Jersey).
So, yes, Golden Nugget is the market share leader in New Jersey. But online gambling markets, in particular, are mostly self-contained. It’s going to be much, much more difficult for the company to win in additional markets.
LCA Stock Is Reasonably Cheap, But …
To be fair, even after the rally, LCA stock incorporates at least some of these concerns. The company already is generating positive EBITDA (earnings before interest, taxes, depreciation and amortization). It should continue to do so even with upfront losses in Pennsylvania and Michigan.
Relative to revenue, LCA doesn’t look all that stretched. It’s certainly cheaper than other plays in the sector.
Meanwhile, the size of the iGaming market suggests there’s room for multiple winners. The market isn’t all that big yet, but adoption should accelerate as cash-strapped state governments look for new sources of tax revenue.
Indeed, in Europe, which has a much more mature market, many smaller iGaming companies provided excellent returns for some time. Most were then swallowed up at a premium in the consolidation seen over the past decade.
So the case for LCA stock isn’t that bad, but it has some holes. In a market that is looking at potentially a couple of decades’ worth of secular growth, I’d look for something better.
After all, in the early stages of that kind of market, it doesn’t pay to focus much, if at all, on valuation. Growth is what really matters. And while Golden Nugget is the early leader in New Jersey, there are plenty of reasons to believe it won’t be able to replicate that success in other markets.
It’s those potential winners that I’d want to own — not LCA stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the 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.