Last week, shares of Caesars Entertainment (CZR +0.00%) and Boyd Gaming (BYD 2.37%) jumped on hopes that an online gaming bill would pass in Atlantic City, N.J. This relatively small jurisdiction may start a storm of online gaming nationwide as states look for additional revenue sources.
Online gaming, poker in particular, has been on the table for years, but so far only Delaware and Nevada have taken any real action. I think the Feds will eventually be forced to police online gaming, and if they do, it could be a huge market. But exactly how big?
How big can the market be?
There aren't a lot of public companies with data to report, but one we can look at is Bwin.Party. The company is the combination of bwin and Party Poker, formerly one of the largest online poker companies in the U.S.
The company operates in Germany, Italy, the U.K., France, and Greece, to name a few. These are fairly large countries with well-established gambling traditions, much like the U.S. It is also the second-largest poker network in the world, so it is a reasonable gauge of what a company may generate online from poker, the most likely game to be legalized.
In 2011, Bwin.Party generated $609 million from its online business. Of that, 32% came from sports betting, 32% from casino games, and 26% from poker. Clean EBITDA from this revenue was $199.3, or 24%, a reasonable assumption given profitability for brick-and-mortar gambling and taxes. This gives us a starting point when trying to gauge how much money a company could make from poker.
That's at the company level, but let's put that in perspective with $35.6 billion in gaming revenue for the U.S. during 2011. At Bwin.Party we're still only talking about the revenue and EBITDA of one large Las Vegas casino from online gaming in multiple countries. And that's with sports betting and other casino games, something I don't see being likely on a large scale in the U.S.
Janney Capital Markets believes New Jersey online gaming could be worth up to $1 billion in three years, or about a quarter of New Jersey's gaming (assuming no cannibalization). If legislation is passed by Congress, we could project a $10 billion market or so based on this estimate. To judge the impact on gaming companies, I've created the table below to project what EBITDA may be from online gaming at a company level.
|
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 |
The center scenario is most likely for a reasonably sized player in online gaming. This would be a company like Caesars Entertainment or the MGM Resorts (MGM 4.77%) partnership I'll cover below.
Who wins?
The winners of online gaming may surprise you. If Atlantic City legalizes gaming, the winners would be existing players like Caesars Entertainment and Boyd Gaming. Caesars has so much debt it really needs a national online gaming bill to make a big impact, not just a state one.
Boyd could generate upside in Atlantic City and it has huge potential if there's a national bill eventually. Boyd has teamed up with MGM Resorts and Bwin.Party to form a dynamic partnership if poker becomes legal nationally. Bwin.Party would own 65% of the partnership, with MGM owning 25% and Boyd owning the remaining 10%. In an analysis I did last year, I predicted that Boyd could easily generate $120 million in EBITDA from online poker alone in this partnership, a much bigger impact given its small size than the much larger MGM would have.
Game makers would also be big winners. WMS Industries (Scientific Games' new acquisition), Bally Technologies, International Game Technology, and Shuffle Master (SHFL +0.00%) have been approved to make online poker games in Nevada. A national network is just a step away. These companies would run games on behalf of casino companies, or that's how it would work under the Nevada model. Zynga is an outsider with an eye on the market as well.
Who loses?
Ironically, if online gaming is legalized in Atlantic City or nationally, one of the losers may be Las Vegas Sands (LVS 2.07%), one of the most successful brick-and-mortar casino companies. CEO and majority owner Sheldon Adelson despises online gaming and has lobbied against it in the past. Of course, he could change his mind, but with a relatively small network of casinos it would be hard to compete with larger rivals.
Foolish bottom line
Online gaming could be huge for gaming companies, but let's not get carried away. We're a long way from online games generating $1 billion in revenue or $300 million in EBITDA for any company. For companies like Caesars, MGM, and Boyd, this could be what they need in order to shoot higher on the stock market. But until we have something more than gaming in Atlantic City, I'm not going to bet on these companies based on online games alone.
