Betting on the growth in online gambling has become a popular theme among investors. Thus far online gambling has only been legalized in a handful of U.S. states, but industry observers see many more states following suit in the coming years. At maturity, the U.S. online gambling industry could generate annual revenue in excess of $20 billion, according to estimates provided by DraftKings.

While it may not be a household name, GAN (NASDAQ:GAN) is another way to invest in the online gambling theme. GAN provides software that powers many of the large online casinos and sports books and is experiencing explosive revenue growth.

person typing on keyboard with casino icons floating

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GAN's Shopify-like business model

GAN is a B2B software provider for online gambling. Specifically, GAN offers a player account management (PAM) solution which handles the entire tech stack of an online casino, including player registration, payments, legal compliance, game content management, and more.

Any land-based casino can use GAN to put up an online storefront and manage the entire technology back end. The casino would still need to handle marketing and customer service, but everything else is fairly plug-and-play. GAN's model is analogous to being the Shopify for online casinos -- a core tech platform white-labeled for gambling e-commerce.

In exchange for managing the back end for a casino's online offering, GAN collects a cut of the total gambling revenue. The rate it collects varies by geography and product, but on average GAN collects around 10% of gross revenue produced by the online casino.

In 2019, GAN's casino partners generated $315 million in gross revenue and GAN generated $29.9 million in revenue. Impressively, GAN is already profitable by generally accepted accounting principles (GAAP) at this low level of revenue, which suggests a potentially large profit margin in the future as the company scales up.

A large new customer

GAN already has many notable customers, including FanDuel (owned by Flutter Entertainment) and Penn National Gaming. However, on GAN's recent quarterly earnings call, the company announced that it just landed a new customer. GAN didn't disclose the name of the casino but noted that it would be a large multistate deal.

"We've reached an agreement in principle with a Tier 1 client that is looking to deploy our GameSTACK technology in new addressable states such as Illinois, Tennessee as well as Michigan and other states in which GAN offers considerable existing operating experience, such as New Jersey, Pennsylvania, and Indiana," management said.

Later on the call, it was noted that the new customer could eventually produce as much as $400 million in annual online gambling revenue. In other words, this contract alone could double GAN's business in the coming years.

Accelerating industry growth

In 2019, the entire online casino market grew 58%, an acceleration from the prior year's growth rate of 30%. Overall growth in the industry is only expected to heat up due to the lasting impact from the COVID-19 pandemic.

Many people who would've otherwise visited physical casinos stayed at home and opened accounts with online casinos. Furthermore, states are more likely to legalize forms of online gambling due to the widening budget deficits they are facing.

These current trends support the long-term growth tailwinds powering stocks like GAN and DraftKings. While there is a great deal of uncertainty regarding which states will legalize online gambling and how big the industry will ultimately get, there are good reasons to be optimistic that the rapid growth will continue for now.