Thursday, November 19, 2015

Amaya crushed by recent news, my stock of the year for 2016

The house always wins, or so they say in the casino business. Amaya (AYA) is a stock I owned several years ago and sold for a nice profit. If I remember correctly at the time the company owned a bunch of slot machines in Mexico and various Indian casinos in the US and did B2B software for casinos. I became reacquainted with the stock recently after reading about the company in a newspaper article. I looked up the company and was surprised to see that it owns several major online poker franchises. From the company website:

Amaya is a leading provider of technology-based solutions, products and services in the global gaming and interactive entertainment industries. Amaya owns gaming and related consumer businesses and brands including PokerStars, Full Tilt, StarsDraft, the European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour and the Asia Pacific Poker Tour.

 These brands have more than 95 million cumulative registered customers globally and collectively form the largest poker business in the world, comprising online poker games and tournaments, live poker competitions, branded poker rooms in popular casinos in major cities around the world, and poker programming created for television and online audiences. 

Amaya, through certain of these brands, also offers non-poker gaming products, including casino, sportsbook and daily fantasy sports. Amaya has various gaming and gaming-related licenses or approvals throughout the world, including from the United Kingdom, Italy, France, Spain, Estonia, Belgium, Denmark, Bulgaria, Ireland, Romania, the Isle of Man, Malta, the state of Schleswig-Holstein in Germany, the province of Quebec in Canada, and the State of New Jersey in the United States.

What makes the company attractive is the recent nuking the stock took after it reported earnings a couple of weeks ago.

The company was the victim of currency differentials. Sixty percent of Amaya's business is in Europe. Their sales were up over 20% but earnings were up only 8% due to the strong dollar. The company also had some issues with getting some of their newer businesses up and running. Specifically their online casino and sportsbook. The company also has a daily fantasy site which it suspended recently due to the New York attorney general beginning an investigation into daily fantasy as a game of chance instead of the game of skill designation that it currently falls under. 

I am not worried by these issues. New York is not opposed to gambling per se as they have lotto, para-mutel wagering, and racinos. The AG is after Fanduel and Draftkings and its about money. In fact, Amaya recently was approved for online poker in New Jersey. You may recall that several years ago online poker was nuked out of existence in the US by the government. However, governments are hard up for cash so it was just a matter of time until they allowed online gambling as long as it is regulated and they get their cut. 

I am fine with that because Amaya has the dominant market share in online poker (71% market share). This is good from a branding standpoint as they can just bolt on their online casino, sportbook, and daily fantasy games as regulators allow online gambling to increase around the world. 

Amaya has over 95 million registered users so all it has to do to offer a new product is write some software add a link on its site and pimp the heck out of it to its existing client base. I think it highly likely that players already registered with Amaya and trusting the platform will be more likely to use Amaya's services then going to whole new site registering, wiring money and putting up with BS to start playing other games. I know I would.

I like this company because of its dominant position in online poker. This allows them to expand their product base to their huge existing audience. Being online means no buildings, restaurants, stores, customer acquisition, etc.. and no casino employees (who are unionized in NV and NJ) and all the BS that goes along with that. Plus most millennials are online and would rather play online. Only middle aged and older people go to casinos. 

The fact that the stock is down as much as it is gives people a real chance to get in on a high margin business with a dominant share that has years of growth ahead of it. This is a buy and long term hold for me. 

Here is a link to the article I referenced above. Read it because the article details some of the other great things about the company like how its margins and cashflow conversion are better than Microsoft and Apple. 

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