Boyd Gaming Corporation (BYD), Zynga Inc (ZNGA): Why Online Gambling Will Crush the Candy

If given the choice to play a game for fun or with the potential to win some reward, I would take the bet and go for the prize.

Boyd Gaming Corporation (NYSE:BYD)

While I enjoy a good game as much as the next person, there’s a greater incentive and rush involved with winning something. Maybe it’s because I have lived within miles of the Atlantic City, N.J. skyline that I have a penchant, or at least an appreciation, for what the casinos have to offer.

That’s why I don’t really see how a game like Candy Crush Saga can command the cult-like following that it’s created, let alone inspire parent company Midasplayer International, or King, consider an IPO. Nonetheless, that’s exactly what the online gaming company is considering at around the same time that the tide for online gambling is beginning to turn in the U.S.

According to a Wall Street Journal report, King has hired JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC) and Credit Suisse Group AG (ADR) (NYSE:CS) to explore a possible debut in the public markets.

So how is King going to be able to compete in an industry where online gambling is becoming legalized state by state? The U.S. online gambling market is projected to reach some $9.3 billion by 2020, according to a Morgan Stanley report cited in Online Casino Reports. Some of the states that have taken the lead on this are Nevada and New Jersey, where legislation for legalized and regulated online gambling has already taken shape.

Indeed, some policymakers are pushing for federal legislation tied to online gambling for the sake of uniformity and consumer protection. This could open the floodgates in terms of the types of businesses that could obtain the proper licenses and operate as online gambling meccas.

Know when to hold ’em

Currently, the upper hand goes to casinos companies such as Boyd Gaming Corporation (NYSE:BYD) and Caesars Entertainment Corp (NASDAQ:CZR). Casinos are already positioned to capitalize on the industry’s paradigm shift and face the least amount of red tape in doing so. It’s not often that you hear the U.S. associated with any ’emerging’ opportunity, but in fact this is how online gambling can be characterized. In Boyd Gaming Corporation (NYSE:BYD)’s 2012 annual report, the company boasts of how it’s well positioned to capitalize on the “emerging domestic online gaming industry.”

Boyd Gaming Corporation (NYSE:BYD) already operates in Las Vegas and Atlantic City, N.J., in addition to a handful of other states. In the first quarter, the company grew its revenue 16.4% to $737 million compared with the year-ago period.

In the first quarter, the company was mired in $4.1 billion in debt and had a cash balance of $322 million. This will slow its growth but if the company manages its balance sheet more efficiently this time around it can emerge stronger.

To be fair, the company is vulnerable to economic and consumer trends, and this can create headwinds that are out of its control. For instance, Boyd Gaming Corporation (NYSE:BYD) has faced challenges such as the fallout from New Jersey’s Hurricane Sandy, the emergence of a payroll tax that consumers continue to grapple with and delays in tax refunds from the 2012 tax year. Boyd Gaming Corporation (NYSE:BYD) also benefited from tailwinds such as a recovering housing market and rising stock market, all of which play into consumer sentiment and spending.

Perhaps the most compelling catalyst for this company is its first-mover advantage in the online-gaming market. It will be among the first to offer online gaming in New Jersey and expects that it will be able to capture share quickly with its well-known Borgata brand, in which it has a 50% stake. Boyd Gaming Corporation (NYSE:BYD) is also considering offering online poker in Nevada but the company admits that the market there is going to be “robust and crowded,” according to the first-quarter earnings call.  These opportunities are long-term in nature and yet remain nascent, a combination that doesn’t come along every day.

At the end of the day, if online gambling is opened up, then there’s nothing stopping companies like King from participating. How well it could compete is the question, but an ability to cross-sell or upgrade its existing user base to an online gambling platform wouldn’t be a stretch.

But there are questions surrounding King’s potential IPO. All you have to do is watch the Zynga Inc (NASDAQ:ZNGA) story unfold to question why a company with a similar business model would tempt fate. Earlier this month, Zynga Inc (NASDAQ:ZNGA)’s reality came to light when the company announced an aggressive cost-cutting program that includes slashing nearly one-fifth of its workforce by summer’s end, taking charges of about $30 million over the next couple of quarters and reporting an approximate $15 million stock-reversal expense.

At the end of the day, the company expects to save as much as $80 million in pretax annualized cash expenses. It also expects to report a second-quarter loss and bookings that are at the lower-end of previously offered guidance.  The company itself said that with the exception of Farmville, its games are “under-performing.”  Revenue appears to be on track as expected.

Know when to fold ’em

When Zynga Inc (NASDAQ:ZNGA)’s relationship with Facebook took a turn, it lost a whole lot more than the cachet of being able to promote its brand on the social-networking giant’s site. It lost access to more than one-billion users and access to data on that base. Since March 31, which is the date the Zynga Inc (NASDAQ:ZNGA)-Facebook dynamic formally changed, shares of the online gaming company are down about 9%.

Zynga Inc (NASDAQ:ZNGA)’s fate, analysts suggest, lies in its ability to capture mobile market share. The opportunity is there, as according to eMarketer cited in a recent article in The Wall Street Journal, the market for virtual goods, a Zynga Inc (NASDAQ:ZNGA) trademark, is making a mobile push with sales growth of 32% pegged for this year alone and an anticipated $1 billion plus in sales on tap for 2015.

King is not Zynga. But it’s still going to be competing with the online gambling community for not only players but also investors.

Another way to play the expansion of the gambling industry to the Internet is by investing in security stocks, like Lifelock Inc (NYSE:LOCK). The rise of online gambling is going to cause more of the population to become concerned with the security of their financial information and their identities. Lifelock Inc (NYSE:LOCK) and other security companies can use this as leverage to promote their brands.

Perhaps it will help the company swing to a profit after reporting a first-quarter net loss of $4.1 million, or -$0.05 per diluted share. Revenue climbed 42% in the period to $82 million in the year-ago period. Lifelock Inc (NYSE:LOCK) generated $11.5 million in free cash flow and spent $1.3 million in capex in the first quarter. If this company plays its cards right, I see it benefiting from the rise of online gambling.

As of March 31, the company had a total of $145.3 million in cash and cash equivalents, which is enough to fund its operations for the next year, especially considering there is “no outstanding debt,” according to the latest 10Q filing.


So maybe online gambling actually crushing the candy game is a bit of a stretch, especially if the market opens up and companies like King can eventually compete with the Boyd Gaming’s of the world. In this case, the barriers to entry are weakened and the casino stocks don’t hold as great an advantage.

Considering the snail’s pace at which legislation typically takes shape in the U.S., the best bet would be the casino stocks and not operators like Zynga that might play in online gambling eventually. I would place a bet on Boyd Gaming, and I’d double that bet if it shows signs that it is addressing its debt load. Another way to play this is in security stocks. If Lifelock Inc (NYSE:LOCK) markets itself right, it could ride this wave too so that’s a company to watch.

Keep in mind that once casinos are forced to show their hand and the net for online-gambling players widens to more companies as a result of new policies, the game changes entirely.

Gerelyn Terzo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Gerelyn is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Why Online Gambling Will Crush the Candy originally appeared on is written by Gerelyn Terzo.

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