New Jersey’s Atlantic City is well known for its casino’s and gambling, but now that concept has been taken online. On Feb. 26 New Jersey Governor Chris Christie legalized online gambling, as long as it is affiliated with in-state casinos. Nevada and Delaware have also signed similar legislation into law. This is what boosted both Zynga Inc (NASDAQ:ZNGA)‘s and Glu Mobile Inc. (NASDAQ:GLUU)‘s stock prices in the past month, especially Zynga’s. The idea is that Zynga and Glu (who recently released a real money gambling app in the UK) will be able to boost their top and bottom line’s by tapping into the huge real money gambling market in the US. Glu already is entering the UK gambling market, and Zynga is planning on offering real money gambling games on Facebook Inc (NASDAQ:FB)‘s online platform.
Glu is currently working with Probability (a UK company) to create a suite of casino apps, and Zynga has applied for a gambling license in Nevada (Nevada’s online gambling legislation is a lot less strict than New Jersey’s). While Glu hasn’t been pursuing the US gambling market like Zynga Inc (NASDAQ:ZNGA) has, one can assume with the recent legislation they will be releasing apps for real money gambling pretty soon for the US. The question is, will this help turn around Zynga’s and Glu’s stock prices, or will they continue their decline after the excitement calms down?
The US Gambling Market
The US commercial casino market is a $34 billion per year market, with a lot of gambling happening in Las Vegas ($6.069 billion gambled a year) and Atlantic City ($3.318 billion a year), according to the American Gaming Association. This is a very bullish sign for online gambling, as these are the 2 states that just legalized online gambling. Keep in mind that Zynga Inc (NASDAQ:ZNGA)’s 2012 revenue was $1.281 billion, and it was $81.69 million for Glu Mobile. If they can get into this market (especially Zynga, as they have already applied for the license), they will dramatically boost their growth rates. This will cause revenue and profits to go up, investor sentiment to change to a bullish stance, PE expansion, and their stock prices to go up. All very good news for shareholders. It is hard to predict how much extra revenue will come in, but if the UK is any indicator, it will be a lot. In the UK, where online gambling is already legal, online gambling is expected become a $3 billion a year industry in 2013, and will grow by 34% over the next 4 years in Europe. Zynga Inc (NASDAQ:ZNGA) already has a large fan base for its online poker game in the US, so I would expect it to take one of the largest market shares in the online real money poker industry in the US.
Other States
Nevada, New Jersey, and Delaware, have all legalized online gambling recently. Two other states, Illinois and Pennsylvania, are also considering passing similar laws. If they do, then expect a large run up in Zynga’s stock price and a smaller bounce in Glu Mobile. I assume that Illinois will pass its law, because Governor Pat Quin (Democrat) said he would pass gambling expansion under the “right conditions.” So far the bill has passed the Senate Executive Committee by a 10 – 4 margin. Keep in mind both state legistative chambers are controlled by the same party, as is the governor seat, so that makes it much easier to pass legislation. In Pennsylvannia it will be a much harder road, as the party that controls the state government (Republican) is proposing a law to ban online gambling, while the party that isn’t in control is doing the opposite. It’s still to early to see how this plays out, but it won’t be easy.
Final Thoughts
If you had told me Zynga Inc (NASDAQ:ZNGA) and Glu Mobile were worth looking into a few month ago I would have laughed at you and pointed towards their valuation and terrible stock performance. But now that the times are changing, it seems these stocks are worth taking a look at. It isn’t just the US gambling market to look at–they also are moving into international markets as well. The UK market is growing fast and offers a lot of potential to these two companies. But the UK already has a lot of competition, so the US will offer the biggest rewards and the biggest chance to gain a lot of market share, as long as Zynga and maybe Glu Mobile can get a first movers advantage. It will be interesting to see how these stories play out and would probably be worth taking a small speculative position in these stocks. Already Zynga and Glu are up big, but larger gains lay ahead.
The article How To Play Online Gambling originally appeared on Fool.com and is written by Callum Turcan.
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