The future of Golden Nugget Online got a little more clear with the expectation of a completed merger. On Monday, Golden Nuggetannouncedthat the Landcadia Holdings and Golden Nugget Online merger could be official in the coming weeks. The vote was originally expected to take place on Dec. 11 but was pushed back to Dec. 29.
Golden Nugget has the biggest online casino in New Jersey with over $289.4 million in revenue so far in 2020. That's 80% more than it generated for the same period last year and is 60% greater. Golden Nugget Online went public at the end of December with limited analyst and media coverage. The online gambling company just entered Michigan for expansion into a second state. A golden ticket Landcadia is trying to bring Golden Nugget Online Gaming (GNOG) public through the merger with the SPAC, a maneuver that has gained popularity this year and brought public numerous.
Assuming the vote goes through on Dec. 29,Golden NuggetOnline (GNOG) will hope to finalize the merger before the year-end. Shareholders will be able to vote on the transition but it is expected to go through without a hitch. So far, 99% of votes have been in favor thus far.
Golden Nugget Online will be just the second online-only gaming operation on the stock exchange.DraftKings Sportsbook(NSDQ: DKNG) is the only other purely online casino and sportsbook. GNOG is owned by Houston Rocket Owner Tillman Fertitta. He also owns Golden Nugget casinos and the Landry Inc. restaurant brands.
Golden Nugget Online Shows Promise In New Jersey
Currently, Golden Nugget Online is only operating its online sportsbook inNew Jersey. In order to gain momentum with their product, Golden Nugget Online must develop itself as a real player.
Well, they showcased that during theinvestor presentationin June of 2020. Golden Nugget Online reported a 13% market share in New Jersey. This would make it tied for the second-largest iGaming platform in the Garden State.
An iGaming spinoff of their land-based casinos,Golden Nugget Onlineoffers a full assortment of virtual poker, blackjack, slots, and more on their online casino platform. They also are offering an assortment ofsports bettingoptions on their platform. This is going to be the biggest area of improvement in the future.
Compared to 2019, Golden Nugget Online grew 93% in gross revenue for September 2020. Their net revenue also grew by 92% compared to 2019. Their growth is strong but their bandwidth will hinder them going forward. This will need to change in order for Golden Nugget Online to be truly successful.
Golden Nugget Online 2021 Expansion Plans
Following the successful merger, Golden Nugget Online will look to grow its bandwidth across multiple states. Golden Nugget operates casinos in New Jersey, Nevada, Mississippi, and Louisiana.
Nevada
- They are not currently operating a mobile sportsbook or casino in Nevada. This should be the first place that they move forward with an online sportsbook launch. West Virginia
West Virginia
- Golden Nugget Onlinesecured accessto West Virginia in November. This could be their biggest opportunity to get into the state quickly. West Virginia granted them a license on Monday. The appears to be imminent in West Virginia.
Michigan
- Golden Nugget Online was issued a provisional license in Michigan. They are expected to launch sports betting and anonline casinoin Michigan in early 2021.
Lousiana
- Lousiana is poised to launch sports betting in 2021 afterquickly approving its rulesearly last Friday. This will be an immediate opportunity for Golden Nugget Online because they already operate a retail casino in the state.
Mississippi
- Currently, Mississippi does not offer mobile sports betting within the state. There isn’t much momentum to legalize mobile sports betting in the state. These could be easy targets for Golden Nugget Online to rapidly expand their markets if legalized sports betting becomes reality because they operate a retail casino in the state.
New York
- New York has not legalized mobile sports betting at this time. However, Gov. Andrew Cuomo opened the door for an early 2021 launch. If there is an opportunity to launch in New York, Golden Nugget Online will look to gain access quickly. They do not operate a casino in New York at this time so they will need to agree with a casino partner.
Golden Nugget Online Gaming (NASDAQ:GNOG) went public on Dec. 30, after merging with a SPAC (special purpose acquisition company) called Landcandia Holdings II. Based on my calculations, GNOG stock is worth considerably more, up to 65% more, based on a simple comparison with Draft Kings (NASDAQ:DKNG).
© Provided by InvestorPlace A man looking at a computer with poker chips on the screen.Keep in mind that Golden Nugget Online Gaming is not in any way related to Golden Nugget Casinos (based in Las Vegas and Laughlin).
That company is privately held by Tilman Fertitta. However, Fertitta’s interests do own about 52% of GNOG stock, but we don’t yet know the exact amount of shares for two reasons.
Golden Nugget Online Gaming Merger
First, it appears that Golden Nugget Online Gaming does not even have its own investor relations website yet. Its NJ gaming site does not have any information on the company as a public entity. Second, the company has not filed with the SEC its final share count information, nor have Fertitta’s interests filed.
Moreover, this deal was a little different than most SPAC mergers. There was no PIPE deal (private investment in public equity) with institutional investors. That is a great thing for the public investors since they now own about 46% of the GNOG stock. This is based on nothing more than page 5 of the company’s investor presentation from July.
It is also the reason why it took two shareholder meetings in December for the deal to close. Moreover, this is making the stock a bit more volatile than most other SPAC mergers. For example, it appears a lot of investors have been selling their shares in GNOG since the merger closed on Dec. 30.
Nevertheless, after carefully studying the company’s presentation and its Q3 earnings report, GNOG stock is worth considerably more than its present price. Here is why.
What Golden Nugget Online Gaming Is Worth
GNOG stock is trading for about 12 times its revenue on an enterprise value basis. But DKNG stock trades at about 19.5 times EV-to-sales.
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Therefore, assuming both companies should have a similar or fairly similar valuation as the only two online gaming stocks, GNOG should move up in value. This implies that GNOG stock should trade about $33.92 per share or 65% above its price on Jan. 5 ($20.59).
Here is how I came up with this valuation calculation. First, the slide presentation from the original June 29 announcement indicates on page 5 that about 68.3 million shares will be outstanding. Therefore at today’s price, the market capitalization for GNOG stock is $1.406 billion.
Next, to derive the pro forma enterprise value, we need to add in the net debt after the merger closed. We won’t know the final numbers until its Q4 earnings release later this month. But the presentation indicates there will be $150 million in debt and $88 million in cash. That works to net debt of $62 million. Therefore, the enterprise value (EV) is $1.468 billion.
Now we can estimate the company’s pro forma 2021 enterprise value-to-sales ratio. Based on its presentation, again on page 5, Golden Nugget Online Gaming will make $122 million in sales during 2021. This also corresponds with its Q3 numbers where it made $25.9 million in net revenue. On a run-rate basis, that works out to $103.6 million. the 2021 estimate of $122 million in gaming sales assumes 17.7% growth during 2021.
As a result, we can derive the EV-to-sales ratio by dividing $1.468 billion (EV) by $122 million (2021 sales estimate). That works out to 12 times.
This is significantly below DraftKings’ EV-to-sale ratio. Based on my estimates their valuation is 19.5 EV-to-sales.
What to Do With GNOG Stock
Based on this information we can multiply 19.5 times the $122 million in 2021 sales. That gives GNOG stock a $2.379 billion EV. After subtracting the $62 million in net debt, the target market cap should be $2.317 billion. Now, since we know there are 68.3 million shares (see above), the price should be $33.92. This price is 65% above its $20.59 price on Jan. 5.
Online sports betting is slowly gaining acceptance on a state-by-state basis. Recently Golden Nugget Online signed up sports betting hotel deals in both West Virginia and Michigan.
Moreover, GNOG is gaining a reputation as having some of the best “matching” deposit rates. Apparently, if you deposit $1,000, GNOG will match those amounts in matched play up to $20,000. This is going to make online gaming extremely popular in the states where it is approved.
Once the company announces its Q4 earnings, we will have more detailed financial information to value the stock. At that point, I believe it will become apparent how cheap GNOG stock is compared to DKNG stock. The arbitrage between the two stocks’ valuation will likely quickly close.
Moreover, Golden Nugget Online Gaming made it clear it wants to have access to capital by being public. Here is what that means on a practical basis. They are going to push up the stock before selling equity.
In effect, this was a very smart move by Fertitta. He did not follow the typical route of giving PIPE hedge funds a discount at $10 per share like most SPACs. By selling shares at a much higher price, there will be less dilution and a higher upside for GNOG shareholders.
So, if you believe my calculations, you now have an early insight into what will likely happen. The bottom line is GNOG stock is worth at least 65% more or $33.92 per share.
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On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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Mark Hake runs the Total Yield Value Guidewhich you can review here.