Should you buy the pullback in Landcadia Holdings (NASDAQ:LCA), or is it time to give up on LCA stock?
Shares in the SPAC (blank-check company) have dipped since late September. Granted, this is mostly due to the specter of more SPAC regulations. But, it’s possible investors who bought on headlines alone are taking a closer look at the details.
Speculators bid shares higher after it announced acquisition of Golden Nugget Online Gaming (GNOG). But while GNOG has posted strong numbers, this online gambling “also ran” could stall out sooner than anticipated.
The company’s focus on iGaming (online casinos) rather than just sports betting may offer a clearer path to success. Names like DraftKings (NASDAQ:DKNG) and Penn National (NASDAQ:PENN) are trying to dominate the lower-margin online sportsbook space.
GNOG’s focus on the casino end of online gambling could pay off, as more states legalize iGaming.
That being said, there are some red flags. Namely, the potential motivations behind this deal. With billionaire hospitality mogul Tillman Fertitta involved on both sides of the transaction, you may not want to buy what the “smart money” is selling.
So, what’s the call? The jury’s still out. Those who want to bet LCA proves its critics wrong may want to tread carefully.
LCA Stock and iGaming Competition
One factor this particular online gambling stock has going for it is its focus on a less glamorous, but potentially more profitable segment of the market. Names like DraftKings, FanDuel parent Flutter Entertainment (OTCMKTS:PDYPY), and Penn National (NASDAQ:PENN) are spending heavily on marketing to capture share in the online sportsbook space.
But, while Leucadia’s merger partner GNON offers sports betting, its focus is on the online casino space, and based on its New Jersey results, it’s already a winner right out of the gate.
Posting positive operating earnings, and with net revenues rising 78% over the prior year’s quarter, rapid growth is clearly in motion.
Yet, as our own Vince Martin discussed Oct. 12, it’s debatable whether it’ll have similar levels of success in other markets. Because of its Atlantic City operation, yhe Golden Nugget brand is well known in the Northeastern United States, buy in other parts of the country this brand has much less recognition.
Yes, there are Golden Nugget properties in Nevada (Las Vegas and Laughlin), as well as in Louisiana and Missisippi. But, the brand is hardly on par with that of Caesars (NASDAQ:CZR) and MGM (NYSE:MGM).
What happens when either gambling powerhouse invests more into this emerging industry? Golden Nugget could get left in the dust. That being said, the company may not have to dominate in order to be a winner for investors.
There’s A Bull Case, but It’s a Long-Shot
So far, I’ve been bearish on the prospects of LCA stock. But, I concede there’s a bull case to be made.
The odds GNOG climbs to the top of the gambling heap remain long. But, this company could still win big, even if it grabs just a small piece of the market.
As this commentator noted, iGaming could have a total market opportunity of $22 billion. Even if it winds up with just a 5% market share, that’s still a billion dollar business.
As the industry matures, customer acquistion costs (promotions/incentives) will come down, and margins will grow.
Established online gambling companies like Flutter have operating margins over 20%. With this in mind, the implied market value of LCA stock post-merger (around $750 million) looks cheap relative to potential future earnings.
It’s no slam-dunk, though. For one, it’s questionable whether the combined company will have enough cash to fuel growth to $1 billion per year in revenue. Based on pro forma financial statements, the company will have just $80 million in cash once the deal closes.
Compare that with DraftKings, which has an over $1.2 billion in its war chest. Or the major casino operators, which have cash flows from their land-based properties to subsidize initial losses.
Barring an equity raise or strategic partner investment, growth could stall out faster than you think. And without growth, it’ll be hard for this “story stock” to maintain today’s valuation.
The Jury’s Still Out on LCA
Fast behind its peers in size and scale, Golden Nugget remains an underdog. Sure, down the road the company could make a great bolt-on acquistion target for a larger rival.
Given its affiliation with the Golden Nugget land-based casino chain (still owned by Fertitta’s Landry’s holding company), I’m doubtful Caesars, MGM, or Penn will buy this company out.
So, as we approach the closing of the GNON acquistion, what’s the call with LCA stock? The company may surprise, and those buying now could see gains as iGaming expands from coast-to-coast. But, given the long-shot odds of this “also-ran,” tread carefully before diving into shares.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.
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