How Big Can Online Gaming Really Be?: Boyd Gaming Corporation (BYD) and More

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Last week, shares of Caesars Entertainment Corp (NASDAQ:CZR) and Boyd Gaming Corporation (NYSE:BYD) 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?

Boyd Gaming Corporation (NYSE:BYD)

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 International (NYSE:MGM)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.

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