In today’s Daily Alert, Crisis & Opportunity Editor Christian DeHaemer suggests a low-priced stock that’s a play on the likely resurgence of online poker in the U.S.
“Back in the early 2000s, I knew people who would play six online poker games at the same time. Publicly traded online gaming companies went up a thousand percent. Then, in 2006, Congress passed a law making it illegal to make transactions from banks to online gaming sites. This killed the sector in the United States.
“But now we have a new opportunity. Back in February 2013, New Jersey Governor Chris Christie signed legislation authorizing online gambling in the state, clearing the way for Internet betting to begin in the second half of 2013. ... Now I present Zynga (ZNGA).
“You might know this company from its popular Facebook games like Words with Friends, FarmVille and Mafia Wars. The company is moving away from Facebook and moving towards mobile. Mobile users increased 75% last year to 72 million out of a total of 298 million users. Zynga has the fifth largest base of mobile users in the U.S.
“The big growth will come from online gambling. Zynga has the largest free-to-play online poker game in the world with 40 million users. It also partnered with Bwin Party to launch a real-cash gambling game in the U.K.
“Zynga has $1.28 billion in cash, or $1.64 per share. Shares are trading at $3.43 as I write this. The company has $100 million in debt. Its market cap is $2.69 billion. If you net out the cash, the market cap is $1.41 billion. Revenue was $1.28 billion last year, but the company spent more than it took in, mostly on bad acquisitions (-$209 million).
“And as you can see by the chart, the company has been rising on high volume.
“You should know that the last lockup expiration from the IPO happened in August 2012, so you don’t have to worry about that. The company also got a raft of downgrades over the past week or so, which is a great contrarian indicator. These are the same ‘analysts’ who were pushing the company at $14. You know the Wall Street game.
“The way I see it, you are paying some $200 million over revenue (minus cash) for the largest poker company in the world. It is also one of the fastest-growing mobile companies in the world. I know young adults these days who don’t own a computer; everything is from their phone or tablet. Mobile is where the future is.
“The upside scenario is that Zynga goes from losing money to making money, which it could do easily just by cutting spending. As you know, companies launch when going from a loss to a gain. The second catalyst is gambling. Three states have legalized online real-money gaming. Once the tax revenues start to flow, the rest of the states will follow. Most states now have casinos anyway, so the moral hurdle is non-existent.
“Zynga is a good speculative bet on future gaming and mobile. It’s cheap, unwanted and in the right sector. It has enough cash to last for six years at the current burn rate, so any talk of bankruptcy is nonsense. The chart shows an uptrend with higher highs and higher lows. It is now at the bottom of that rising channel. Wall Street is telling you to sell, which means they are buying. The upside catalysts are clear.
“Buy Zynga under $3.46. Price target: $13.26. Stop-loss: $2.96.”
- Christian DeHaemer, Crisis & Opportunity, March 22, 2013