Online Poker’s Enormous Potential Impact

The full-court press for online poker has begun in earnest and there are some heavyweight alliances forming. Caesars Entertainment is aligned with 888 Holdings, and Wynn Resorts (Nasdaq: WYNN  ) formed an alliance with PokerStars, one of the largest online poker companies. The latter pair expressly stated that they would work to pass federal online gaming regulation.

So far MGM Resorts (NYSE: MGM  ) and Las Vegas Sands (NYSE: LVS  ) are sitting out, but another big dog online, Full Tilt Poker, is yet to form a similar alliance. It may be speculation, but MGM’s wide range of casinos in the U.S. and on The Strip seems like a perfect fit for some sort of deal with Full Tilt Poker.

The potential is enormous
So what kind of an impact could online poker have on the value of gaming companies? The numbers get big awfully quickly. Forbes magazine estimates that Full Tilt Poker alone generated $500 million in revenue and $100 million in profit during 2010. The Financial Times estimated that in 2008 online poker revenue was $5.9 billion worldwide.

Since actual audited numbers aren’t available to us, we are left to make some educated guesses at what the impact might be. I’ve created a table of possibilities that cover modest revenue of $500 million to a high end of $10 billion annually. And since we don’t know exact margins I’ve estimated that EBITDA margin will fall in the range of 20% to 40%. Since there is very little depreciation in online gaming, unlike brick-and-mortar casinos, a huge chunk of revenue would flow to the bottom line.

Revenue/EBITDA Margin 20% 30% 40%
$500 Million $100 Million $150 Million $200 Million
$1 Billion $200 Million $300 Million $400 Million
$3 Billion $600 Million $900 Million $1.2 Billion
$10 Billion $2 Billion $3 Billion $4 Billion

These millions of dollars would have to be split among MGM, Wynn, Las Vegas Sands, and any multitude of online gaming companies. But the big players would catch most of the cash since poker rooms require a critical mass of customers and advertising dollars for promotion.

If we take MGM Resorts as an example and assume it can obtain a 10% market share of a $3 billion annual market at 30% margins -- that would add $90 million in EBITDA annually. I think that’s a pretty conservative number and could generate more EBITDA than the terribly disappointing CityCenter.  

Of the big four, I think MGM has the most upside, with Macau-based Melco Crown (Nasdaq: MPEL  ) having little to no impact since it has no U.S. presence. What’s an advantage in live gaming becomes a disadvantage when the game moves online.

It’s unclear exactly how any regulation may play out, but the opportunity for casino giants is enormous. Stay tuned to see how this one ends.

Interested in reading more about gaming stocks? Add your favorite to My Watchlist, and My Watchlist will find all of our Foolish analysis on those stocks.

Fool contributor Travis Hoium is long Melco Crown. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Melco Crown Entertainment is a Motley Fool Global Gains choice. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 08, 2011, at 3:46 PM, TMFFlushDraw wrote:

    Correction:

    Full Tilt did agree to an alliance with the Stations Casino owners. Sounds pretty soft and no details were announced but I did overlook this in the article.

    Travis Hoium

  • Report this Comment On April 08, 2011, at 6:04 PM, pillback wrote:

    Although the online poker revenue is large, this article doesn't accurately portray why. A lot of the lower stakes games on the site have the highest percentage rake. These games are not offered at casinos and have a very wide player pool. Also, there are now more pros in the higher level games than there are recreational players. Online poker now is low stakes rec, high stakes pros. This article has little to no credibility because it doesn't lay out the stakes in which the money is made. Most of the money comes from areas in which casinos would never make in the first place. Get the facts on rake and tourney fees around the board, and then see how the numbers look.

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