Is GNOG Stock a Golden Opportunity or Fool’s Gold?

Despite what was largely seen as a solid first earnings report after going public, shares of Golden Nugget Online Gaming (NASDAQ:GNOG) are down 14% in the last five trading days. As this seems to be a trend across the sports betting sector in general, there may be nothing to this story other than a normal pullback.

However, more than other stocks in this sector, Golden Nugget Online Gaming may illustrate both the risk and the reward of the online gaming sector. The company went public via the special purpose acquisition company (SPAC) Landcadia Holdings. The SPAC was sponsored by Tilman Fertitta who owns Golden Nugget’s network of casinos and a significant portion of GNOG stock.

With that in mind, let’s jump right into one of the risks of owning GNOG stock. And that is the fact that Fertitta has just announced that his company Fertitta Entertainment is going public via a SPAC, FAST Acquisition (NYSE:FST). The deal is valued at $6.6 billion and one of the assets that Fertitta is including in the transaction is his controlling stake in GNOG.

And the problem that this presents is that when the Landcadia-Golden Nugget reverse merger was first announced, there was some concern that Fertitta was doing this to generate some quick cash to pay down the deft of his hospitality empire. That debt has certainly only increased during the pandemic.

With that said, this new SPAC could turn out to be a benefit to GNOG stock or it could turn out to be one of the worst things to happen to the stock. Either way, it may be one reason that investors are looking away from the stock.

Online Gaming is Big Business

Last November, an additional three states legalized sports betting and more are on the way. Sports betting either in-person only or online and in-person is now legal in nearly 50% of the country.

The global online gambling market, of which sports betting is a large part, is projected to reach $92.9 billion in 2023. That’s up from $59 billion in 2020.

Any arguments about a slippery slope have taken a back seat to budget shortfalls that have been amplified by the pandemic. Online sports betting helps states to offset that shortfall. And that means that we’re likely to see more states approve legislation in order to cash in.

However, there is a real concern that as the economy reopens the demand for online gaming will lessen as casinos and their live sportsbooks continue to welcome gamblers back. That’s fair, but there are a couple of catalysts for online gambling. The first is that the ability to gamble via their mobile device without the other “expenses” incurred by a casino visit is attractive. And on a related point, some of these online casinos are now accepting cryptocurrency which adds a layer of security and anonymity.

A Small Fish In a Growing Pond

I said that Golden Nugget’s earnings report was mostly positive. If it left analysts lacking it may have been due to the forward guidance. For 2021, the company is forecasting revenue of $130 million to $145 million. If they hit the midpoint of that guidance, it would be a year-over-year increase of 51%.

But as I pointed out above, analysts are expecting more, much more. MGM Resorts (NYSE:MGM) recently projected its online gambling revenue would double in 2021. And DraftKings (NASDAQ:DKNG) which has approximately 14x more revenue than GNOG said it was expecting revenue growth between 40% and 55%.

That’s a reminder that Golden Nugget is still a small fish in this pond. And while the company does have the strong branding that comes from the Golden Nugget name, whether that will be enough is a fair question.

I have seen many bullish arguments about GNOG stock. And it has some passionate advocates among the Reddit crowd. Is the stock more attractive at $14 per share than it was at around $26? Absolutely. However, price doesn’t always equal value and with other sports betting stocks also trading lower, there may be better options in this sector.