What New Jersey's Online Gaming Means for Your Investments

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Online gambling will be a reality in New Jersey. Governor Chris Christie signed a bill that sets a 10-year trial period for online gaming, a trial the state is unlikely to let expire. Casinos will be able to allow any game currently on the casino floor, and 15% of profits will be taken as a tax by the state.  

Companies currently operating casinos in Atlantic City will be first in line, and it's unclear right now if others will be added. That means Caesars Entertainment (NASDAQ: CZR  ) and Boyd Gaming (NYSE: BYD  ) have a head start on competitors, one that both companies could use.

A boon for Atlantic City... or that's the hope
This is really a lifeline for Atlantic City, which fell behind Pennsylvania for second place in gambling revenue in the U.S. last year. The city generated about $3 billion in gaming revenue last year but that was down 8% from the year before, and there are rumors that multiple casinos are not far from closing. Online gaming could turn the decline into revenue growth if everything goes as planned.  

What's unknown is the scale of gaming revenue New Jersey can generate. Is $1 billion within reach? What about $2 billion? Who will take share and how many competitors will there be?

There's also a question of whether or not Atlantic City will benefit or be hurt by online gaming. PokerStars recently announced an offer to buy The Atlantic Club, an unprofitable Atlantic City casino, with the hopes of gaining favor in New Jersey gaming. Is there any doubt PokerStars would rather have people gambling online than in an expensive casino with expensive tables, dealers, drinks, etc.?  

This may actually be a negative for Atlantic City, allowing casinos to attract gamblers online instead of in-person and attracting smaller bets as well. Gaming companies will benefit from online gaming, that's for sure, but I'm not so sure Atlantic City will.

Is this the start of a trend?
The big question for investors is whether this is going to be a national trend. So far, Nevada and Delaware have passed some sort of online gaming bills, and others may follow. But it's still unclear if states will be able to accept bets across state lines, as they hope, of if the federal government will somehow get involved.

I think online poker and maybe sports betting will be a matter of time. Other games I see as less palatable on a national level. I'll predict that this is a mini-trend for online gaming. With actual play still months or even a year away, there is time to answer the other questions.

Who wins?
The most important question for investors is: Who wins?

Caesars is a clear winner, with gaming licenses across the country and the World Series of Poker brand. Boyd Gaming has a partnership with and MGM Resorts (NYSE: MGM  ) , which should be advantageous, but MGM was forced to leave New Jersey because of its ties to Pansy Ho in Macau, so MGM may be behind the curve.

Glu Mobile (NASDAQ: GLUU  ) and Zynga (NASDAQ: ZNGA  ) have also set their sights on online gaming to save their floundering businesses. Zynga has a huge play-money following, but it's unclear how that would transition to real money. I doubt that high-stakes players would see Zynga as an attractive choice off the bat, and once novice gamers lose their shorts after playing less-skilled play-money players, I doubt they'll stick around long-term.

Glu Mobile may take the supplier angle, providing games and back-end services to casinos that don't want to build the technology themselves. They would be competing with the likes of Shuffle Master, International Game Technology, and Bally Technologies, which have dealt with gaming regulators for years, so it might be an uphill battle.

One step forward
New Jersey coming into the fold is a big deal for the future of online gaming. This will put pressure on the Feds as well as provide another testing ground for gaming companies. I'd take a cautious approach and stick to brand names if you're looking to invest in the trend. Caesars is an extremely leveraged bet that may be saved by online gaming, MGM will play a big role even if it isn't in New Jersey, and Boyd Gaming has the partnerships to be in the game profitably.

Right now, Zynga and Glu Mobile are just too risky and I wouldn't bet that they can dominate online gaming.

What else drives MGM Resorts?
Building a casino on Cotai and building an online gaming presence are two ways for MGM Resorts to dig out of debt from building CityCenter and become a profitable investment for investors. For expert analysis on whether this former high-flying stock can regain its form on the back of a growing presence in Asia and emerging online games, you're invited to check out The Motley Fool's new premium report on MGM Resorts. As a bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out -- simply click here now to claim your copy today.

Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2013, at 1:49 PM, Canyoutellme wrote:

    This article is a joke in regards to ZNGA.

    1) ZNGA does not have a "floundering" business. They have 1.6 BILLION dollars in the bank and reported net positive on their last earnings. Plus they've done a lot of cost cutting recently to refocus efforts to newer and better things. The "journalist" here missed ALL those things

    2) In the last CEO appearance, he flat out said he is NOT going after high-stakes gamblers. Did this "journalist" miss that call? This is NOT the plan of ZNGA at all! How many "High-Stakes" gamblers are there? a few thousand? How many social gamblers out there? HUNDREDS OF MILLIONS? ZNGA is going after the correct audience for their business.

    3) Did this "journalist" forget to mention the ZNGA and BWIN partnership? YES he did.

    What a joke at reporting here... clearly there's an agenda to push a couple of stocks here and "bash" others... it's laughable that anyone can consider this "reporting."

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