Up nearly eight percent in late trading, Golden Nugget Online Gaming (NASDAQ:GNOG) stock is one of today’s best-performing gaming equities. That’s after a sell-side analyst said shares of the internet casino operator have the potential to more than double.
In a note to clients today. B. Riley analyst David Bain starts coverage of GNOG with a “buy” rating and a 12-month price target of $27, more than double the $12 area at which the stock currently resides. That may sound like an ambitious forecast for a name that’s struggled since going public last December. But Bain actually views the call as conservative.
We believe GNOG’s sustained iGaming market share in New Jersey, the most mature US legal iGaming market, justifies our conservative market share ramp assumptions in upcoming iGaming market go-lives, and offers case study visibility to GNOG’s profitability,” said the analyst.
Bain’s GNOG price target is also well above the Wall Street average of $24.
In the still-young online casinos and sports wagering industries, if there’s one thing, analysts and investors, alike, it’s purity.
That means land-based casino operators moving to sports wagering and iGaming are apt to ascribe higher multiples to companies with no brick-and-mortar casino business. It’s one reason investors previously loved names such as DraftKings (NASDAQ:DKNG) and it’s a possible catalyst for GNOG, according to Bain.
While GNOG does have online sportsbooks in some states, its bread and butter are internet casinos. Bain says that’s a positive because margins are better. While markets currently assign higher multiples to online sportsbook operators than to iGaming counterparts, the analyst believes that situation should be reversed.
“iGaming visibility/predictability, brand loyalty, and customer profitability/value are greater, on average, than for online sports betting (OSB), according to our research. We calculate 1Q21 win per adult in open states was 2.6x greater for iGaming than for OSB,” he said.
Bain adds that cost components are more favorable for online casinos than for sports wagering, leading to superior margins for the former.
When it comes to GNOG stock and comparable, it’s not so much about the states these companies currently operate, but how large the total addressable market will be going forward. Some analysts forecast $42 billion for both iGaming and sports wagering in North America when the industries reach maturity.
Using New Jersey as a template, margins of 30 percent at maturity, and assuming 10 percent market share, Bain notes GNOG could eventually generate earnings before interest, taxes, depreciation and amortization (EBITDA) of approximately $726 million, not counting contributions from sports betting.
There are other catalysts for the stock that investors may not be factoring in, or are outright ignoring.
“The Golden Nugget is an iconic brand/trademark anchored by well-established land-based casinos. GNOG has access to Golden Nugget’s 2.5M Golden 24K rewards members and Landry’s 3M+ select members, a high-value marketing opportunity not truly unlocked at this point, in our view,” adds the B. Riley analyst.