Golden Nugget: A Compelling Play In The Online Gaming Industry

The novel coronavirus pandemic has triggered some fundamental lifestyle changes.

Specifically, the online gaming and gambling sector has been a major beneficiary of these pandemic-driven changes. Golden Nugget Online (GNOG) seems to be well-positioned to gain from the tailwinds.

In terms of the stock price action, GNOG surged to $26.24 at the end of 2020 before reaching a low of $12.80 at the end of March. Currently, shares are changing hands for $13.55 apiece.

As for the analyst community, Jefferies’ David Katz recently initiated coverage on Golden Nugget with a Buy rating and set a $28 price target (107% upside potential). Katz believes that the “iGaming market has not been fully appreciated by the Street.”

With this in mind, sustained upside seems very likely over the medium-term. Let’s discuss some of the potential growth catalysts.

Golden Nugget Positioned For Sustained Growth

Golden Nugget reported revenue of $91.1 million for FY2020, reflecting a 64.4% gain from the previous year. Meanwhile, adjusted EBITDA for the full year was $28.9 million, which implies a healthy EBITDA margin of 32%.

For 2021, the company has guided for revenue in the range of $130 to $145 million. At the mid-point of guidance, top-line growth will be 51%. There are various factors that point to sustained revenue growth.

First and foremost, Golden Nugget estimates that the U.S. iGaming market will be worth $30 to $37 billion at maturity. Assuming that the market size is $30 billion and the company has a market share of 5%, potential revenue visibility is $1.5 billion. Therefore, the industry and the company are still in the early innings.  

Furthermore, the company recently secured market access to Illinois, West Virginia and New York as well as a temporary permit for online sports betting in Virginia. With entry into new markets, the revenue visibility increases.

In its June 2020 presentation, Golden Nugget guided for revenue of $635 million by FY2025. Besides the industry tailwinds, the launch of exclusive games is another factor that could drive growth. The company launched 20 exclusive games in the first two quarters of 2020, and it has 80 games lined-up for the next 18 months (through FY2021).

When it comes to the balance sheet, the company ended FY2020 with a cash position of $77.9 million. Additionally, in March, the company raised an additional $110.2 million through warrant redemption. So, Golden Nugget has ample financial flexibility to pursue aggressive growth.

It’s also worth noting that the company’s EBITDA margin for FY2020 was 32%. In the next few years, further EBITDA margin expansion seems likely. The company is, therefore, well-positioned to deliver healthy operating cash flows.

Another important factor is that 50% of gross gaming revenue in FY2019 was generated by cohorts acquired before FY2018. In other words, the company has a loyal customer base. As market reach expands, existing cohorts will meaningfully impact cash flow upside. With higher visibility, the company’s player acquisition cost is also likely to decline.

On top of this, for FY2016, the company’s casino net average revenue per user (ARPU) was $480. By FY2020, the ARPU increased to $633. If the positive trend continues, Golden Nugget will have multiple margin drivers.

Analysts Weigh In

Looking at the consensus breakdown, 2 Buys have been published in the last three months. So, GNOG is a Moderate Buy. At $26, the average analyst price target suggests 92% upside potential. (See Golden Nugget stock analysis on TipRanks)

Concluding Views

Golden Nugget stock has started to trend higher after bottoming out in March 2021. With healthy growth guidance and its entry into several new markets, more upside could be in the cards.

Additionally, as the online gaming and gambling market expands in the U.S., there is ample room for growth in the next 5-10 years.

Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.