Those who expect Zynga Poker to contribute in a big way should moderate their expectations with a few simple realities:
- Zynga Poker players are not in any way guaranteed to become real money poker players, which is what the company needs to generate any profits worthy of attention.
- Legalization of online poker is still many years away, which discounts tremendously the value of future cash flows from a new, real money poker franchise.
- Zynga Poker players likely have old accounts at “pre-ban” real money poker sites, which will compete with Zynga for players if and when online poker is legalized. Caesar’s Entertainment Corp (NASDAQ:CZR) and Boyd Gaming Corporation (NYSE:BYD), which operate Atlantic City, N.J.-based casinos are already planning to move into online poker after Gov. Chris Christie signed a bill legalizing it in the state.
In short, those banking on poker to make or break Zynga’s valuation should give it a second thought. In the best case scenario where Zynga converts 10% of its users to real money players, generates as much revenue per user as PokerStars, manages net profit margins of 100%, and launches today, the company is at best 20% undervalued.
If an investment is not meaningfully undervalued with pie-in-the-sky assumptions, it’s not even worthy of speculation. Zynga is a loser for investors.
So what about gambling giants?
Zynga isn’t the only way to play legalized online poker. Boyd Gaming is exposed to online gambling, however, the company’s reports show that nearly 80% of its business is derived in traditional brick and mortar casinos, a highly capital-intensive segment of the gaming business. The company is the most exposed to recent changes in online poker legislation as it generates 36% of its revenue in Las Vegas, and another third in New Jersey.
Caesar’s, unfortunately, isn’t expected to generate any profits for some time to come. The company is bleeding in red in terms of earnings and cash flow, and shareholder’s equity is negative once again, giving this company no real intrinsic value despite the company’s exposure to New Jersey and Nevada, both of which are targets for legalized online poker. Caesar’s looks like a much better candidate for bankruptcy than it does stellar stock market returns.
A play on poker, if there were one, would be a play on Boyd Gaming. However, unlike Zynga, Boyd Gaming has very expensive destination and casino properties that will negate most if not all of the gains seen in the digital space. Investors should wait it out. A new company without the legacy issues these three companies face will likely surface should online poker become a profitable endeavor.
The article Why Zynga is Overvalued with or without Online Poker originally appeared on Fool.com and is written by Jordan Wathen.
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