I’ve been skeptical toward Landcadia Holdings II (NASDAQ:LCA) stock for some time now. Of late, the market has disagreed. Indeed, LCA stock has posted a nice rally since late October. It’s nearly doubled over that stretch, from under $12 to a current price over $23.
From a distance, there’s some logic to the rally. Landcadia is merging with Golden Nugget Online Gaming (under the ticker GNOG), making LCA a play on what should be a fast-growing iGaming and online sports-betting market.
GNOG’s plan to prioritize iGaming over online sports betting makes some sense, too. Profit margins in online gambling are higher, while offerings run 24/7. Sports-betting numbers, in contrast, look impressive now but will slow once the NFL season comes to an end.
But there’s a real question relative to the rally of the last two months: Why? The story here really hasn’t changed much, if at all. The vote on the merger with GNOG has even been delayed, if for largely technical reasons that don’t impact the long-term case.
LCA is basically the same stock at $23 that it was at $12. And I didn’t particularly like it at $12.
What’s Caused the Rally?
The most likely explanation for the rally in LCA stock is that Landcadia simply is in the right place at the right time.
SPACs (special purpose acquisition companies) like Landcadia Holdings II have been all the rage this year. Many growth companies need to raise capital on certain terms and with significant speed. On both fronts, the SPAC process is a better alternative to the traditional IPO (initial public offering). Meanwhile, investor appetites for post-merger SPACs show no signs of being satiated.
Online gambling, too, is hot. Investors have bid up online sports-betting stocks on the belief that the novel coronavirus pandemic will accelerate legalization. States facing a “double whammy” from the pandemic — lower tax revenues and higher spending — will need to plug their budget holes. Online gambling taxes could be a fertile source of revenue.
Given those two trends, it’s no surprise that shares of an online gambling SPAC have gained.
Concerns Here and Now
But is Golden Nugget set to take advantage of these trends?
To some extent, yes. That said, I’m not yet sold. Competition is going to be stiff. Existing daily fantasy-sports players already have moved successfully into iGaming in markets like New Jersey and Pennsylvania. (Similar trends have held in Europe.)
GNOG has two disadvantages against those rivals, as well as existing land-based casino operators. For one, it doesn’t have the massive player databases competitors do. And in markets where it was a weak (or in Pennsylvania, nonexistent) sports-betting offering, customers have to go to two different apps to play casino games and bet sports. For some consumers using gambling to risk a few dollars and blow off some steam, even a minimally more complex experience is a negative.
We’re already seeing competitive factors at work. LCA bulls point out that Golden Nugget has leading market share in New Jersey. That’s true. But GNOG’s share is slipping.
Indeed, in November, GNOG lost almost two full percentage points of online casino market share from October. The year-over-year figures are more concerning. In November 2020, GNOG had 29.1% of the market. In November 2019, its share was 39.7%.
The Case for LCA Stock
Admittedly, bulls probably can dismiss these concerns to at least some extent. For instance, it’s true that GNOG has lost market share of the last year. But thanks to explosive market growth, casino revenue actually rose 37% between November 2019 and November 2020.
And New Jersey isn’t the only state that matters for GNOG. Entries into Pennsylvania and Michigan are on the way, with more states likely to follow. It’s not as if the company’s growth is going to come to a halt any time soon.
Despite that growth, the stock isn’t particularly expensive relative to peers. Landcadia itself made that point in its merger presentation back in June. Even after the rally, peer comparisons still look positive. Whether it’s based on revenue or forecasted profits, LCA stock is cheaper than most other online gambling plays, and it might be the cheapest depending on an investor’s perspective.
The catch, however, is that this isn’t the sector to find the “cheap” play. As I’ve written before, investors should be looking for the best play. Golden Nugget’s early performance in New Jersey suggested it might be the best play or close, but with share eroding and more competition on the way, it’s awfully tough to see it as the biggest winner in the space. If it isn’t, after this rally investors probably should look for the company that will be.
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.
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