As the Las Vegas gaming industry gets more competitive, the casino giants such as MGM (NYSE:MGM) and WYNN (NASDAQ:WYNN) are rushing to embrace online poker in the search for new avenues of growth. The U.S. justice department declared last year that only online sports betting was illegal which might allow the states to unilaterally legalize certain forms of online gambling such as poker and lotteries. 
However, in the absence of strict federal laws, the gaming revenues from different states might be at risk due to the difference in their regulations and tax rates. Nevertheless, online gambling can prove to be good news for MGM Resorts which is heavily dependent on the U.S. operations for its revenues. Although the competition might be stiff, the huge market potential and MGM’s brand image would allow for a strong market position. According to our estimates, if the company is able to establish its position successfully in the online gambling market, it would result in at least 10% upside to our price estimate.
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Booming Global Online Gaming Industry Provides Huge Market Potential
About 85 countries have legalized online gambling with around $35 billion being bet every year.  According to the American Gaming Association, millions of U.S. customers are already a part of the global online gambling industry.  The American unauthorized gambling market stood at around $4 billion in 2011 and even without the federal standards the market is expected to grow and reach $ 10 billion in 2017. 
The legalization of online poker will not only add new customers but will also motivate the existing ones to bet more freely. Casinos will also likely target the younger segment of customers, i.e. the 25 to 30 year olds. 
Federal legalization can also be a possibility due to public support and the upcoming elections.  About 800,000 members of the Poker Player Alliance (an advocacy group trying for online poker legalization) are expected to vote for the candidate in support of legalizing online poker at federal level.  Furthermore, the increase in the government revenues from the taxes is an attractive prospect and might facilitate the decision of online poker legalization at federal level, thus opening new market prospects for casinos. 
Online Gaming Could Boost The Stock
While other major players are enjoying the boom in the Macau region, MGM’s revenues are mainly limited to the Las Vegas strip. The company is further looking to expand within the U.S. as it plans new casinos in Massachusetts and Maryland. Moreover, the Las Vegas Gaming industry has been stagnant and the future growth is not expected to be substantial. The legalization of online poker is thus, a lot more important for MGM than the other casinos. In fact Las Vegas Sands (NYSE:LVS) has taken a defensive stance stating that, with everyone rushing in to online gambling market, it might not be as lucrative as it sounds. 
As opposed to physical gaming in the casinos, online gaming does not require any significant infrastructure; hence we expect that more players will enter into this segment. MGM has already partnered with Playstudios to develop an online gaming platform. 
MGM will encounter tough competition from Wynn, Boyd Gaming, International Game Technology and Shuffle Master.  The social media website, Facebook, launched a gaming app in Britain where users can bet real money.  Facebook might look to introduce such an app in the U.S. once the online gambling is legalized at the national level.
Even in the middle of tough competition, MGM will be in a good position due to its brand image in the U.S. The huge online market potential will allow it to improve its casino revenues which constitute 45% to its value according to our estimates. From a little back of the envelop calculation, we estimate that there could be a 10% upside to the company’s stock, assuming that MGM is able to reach revenues of $500 million from online gambling by the end of our forecast period. This calculation assumes a discount rate of 11%.
Our price estimate for MGM Resorts International stands at $11, roughly inline with the market price.Notes:
- Gambling chiefs race for share of U.S. online gaming, Reuters, Oct 3 2012 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Gambling chiefs race for share of U.S. online gaming, Yahoo News, Oct 3 2012 [↩]
- Net poker stance could let pols sway votes, Las Vegas Review-Journal, Sept 30 2012 [↩] [↩]
- Louis Castle has been preparing for this moment for months, Reuters, Jan 6 2012 [↩]