Investor bets on online gaming pay out
Explosive growth bringing flurry of options outside resource sector
It’s time for investors to put away any reservations they may have about the morality of gambling. It’s everywhere — on your TV, at the corner store and, most notably, on your computer, and there is simply too much growth to ignore.
Just in case you haven’t noticed, there has been a flurry of online gaming companies popping up in Canada, quickly vaulting the country into second place in terms of industry market cap behind the United Kingdom, where several TSX-listed names happen to do most of their business.
Investors are understandably jaded about the materials and energy space given poor returns seen in the past few years, but they may be willing to take on some more risk in their portfolios with the equity market starting to act a bit better.
“This is one sector that seems to be growing when there is a low-growth environment globally,” said Greg Taylor, a portfolio manager at Aurion Capital Management. “We’re starved for non-resource growth ideas and it really doesn’t have as much economic sensitivity as the resource sector.”
H2 Gambling Capital, the industry’s go-to source for data, forecasts the value of the global online casino and bingo market will swell to about $13.5 billion US by 2018, representing a compound annual growth rate of more than 10 per cent from 2014.
Those type of numbers have caught people’s attention and are a big driver of some impressive returns in the sector.
Electronic gaming has quickly emerged as more than just a cottage industry in Canada. Amaya Inc.’s $4.9-billion-US purchase of the top-ranked PokerStars and Full Tilt online poker brands made it the largest publicly listed online gaming company on the planet.
That spawned several spinoffs as Amaya looked to reduce its debt load, but its share price performance continues to make a lot of people very happy. Making its market debut in April 2010 at $1 per share, Montreal-based Amaya now trades around $35 as investors seem to be looking past an insider trading investigation in Quebec — at least for now.
It dominates online poker, but with revenues in that industry declining slowly, Amaya is eager to branch out into other casino games and sports betting.
The company also wants to expand beyond its primary market in the U.K., and the United States is the place to be. Online gaming is legal in only a few states such as New Jersey and Nevada, with others taking a close look given the tax revenues they bring in. If the U.S. market opens up, Amaya is ready. And if the same ever happens in Asia, the growth would be tremendous.
There are a growing number of other companies — some with their roots in Amaya — offering attractive growth opportunities for investors in areas such as software, fantasy sports, online payments and even bingo. Not only are most of them making money, but they provide a diverse range of offerings that may suit various levels of risk tolerance.
Intertain Group Ltd., which started as a spinoff from Amaya, has set its sights on dominating the online bingo market. The Toronto-based company is no small player with a market cap of $1.3 billion, thanks to a gain of 155 per cent for the share price in the past year, but it’s also a safer way to play the gaming space and attractive from a demographic point of view.
Bingo also doesn’t have the same reputation problems poker has, it’s growing at a healthy clip and it appears that regulators and governments have grasped onto it.
Innova Gaming Group Inc. operates lottery terminals that look like slot machines, but are essentially just digital “scratch and win” tickets. That helps avoid the regulatory scrutiny traditional slots encounter. As a result, Ontario Lottery and Gaming is really pushing these terminals in bingo halls and gas stations across the province.
The Stoney Creek, Ont.based company is also doing deals with various U.S. states.
“Anyway you can help a government make money is probably a good thing,” Taylor said.
At the other end of the spectrum in terms of size is technology-focused Gaming Nation Inc., based in Thornhill, Ont., with a market cap of about $80 million.
Its core business is the 50/50 cash draws popular at major sporting events. But rather than the old-school way of doing it with two rolls of tickets, Gaming National provides online terminals in stadiums with live pots fans can track.
NHL, NFL and English Premier League teams that use these terminals are seeing massive increases in pot sizes, so their interest should continue as sports franchises try to squeeze more out of their captive audiences. But the company is taking its offering beyond those markets into U.S. high school sports and football stadiums in Texas, and that may end up being the biggest driver of growth.
NYX Gaming Group Ltd. is another small cap tech company that builds the software that runs online games. It’s a unique way to play the gaming space for Canadians because it’s really the arms dealer, and is also home to some familiar legacy assets from Amaya in Cryptologic and Chartwell.
NYX, based in Las Vegas but trading on the TSX Venture Exchange, allows investors to take less consumer risk, as it gets a small cut of actual game play, with no requirements to do things like promotion.
While Canada may be playing catch-up with the U.K. in many respects, it’s leading the way interms of analyst coverage. Eight firms have analysts covering thee-gaming sector, making them more accessible to the average investor.
Dan Daviau, chief executive of North American Capital Markets at Canaccord Genuity Group, which has done almost all of the deals in the space, noted that listing in Canada provides companies with an easy route into the U.S. market. Amaya, for example, started trading on the Nasdaq in June. That, coupled with an increasingly friendly regulatory environment, makes the sector all the more attractive.
They also don’t have large capital spending budgets or a lot assets for that matter, potential pitfalls Canadian investors are all too familiar with in the mining and energy sectors.
“This is one sector that seems to be growing when there is a lowgrowth environment globally.”
PORTFOLIO MANAGER GREG TAYLOR