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Venture capital is becoming ravenous for daily fantasy sports, and fund managers have predicted 2,000% sector growth by 2020. I think MGT Capital Investments (NYSEMKT:MGT) will benefit from this frenzy and double the value of its largest asset by this Christmas. From a current valuation of $4 million, MGT's website FanThrowndown.com will have no problem rallying to over $8 million by Christmas due to first-mover advantage, record-breaking growth rates and generous M&A activity.

Daily fantasy sports is the fastest-growing segment in the entire sports gambling sector. Attracting millions of players every month with same-day payouts, daily fantasy sports boasts massive profit margins, infinite scalability, recurring billing, broad consumer appeal, and near-zero marginal costs per user. Just this week, Forbes discussed a $7 million financing round for a daily fantasy sports website that is just one year old.

I have written about other merits of MGT (no debt, high cash, low enterprise value, pending litigation awards), but in my most recent article, I explained why I had not yet invested in the company. Prior to MGT's 65% acquisition of FanThrowndown.com, the only upside for shareholders was a legal outcome that I cannot not predict. In this essay, I explain why MGT's daily fantasy sports division, by itself, is reason enough for multi-bagger returns in 2013. MGT is the only stock with concentrated exposure to the daily fantasy sports sector, and as a company with a healthy balance sheet plus a nice lawsuit payout kicker (if it wins), I believe MGT represents an ideal investment for this sector.

And for my readers who keep asking: My wife finally allowed me to put some money back into the stock market, so yes, I now have a starter position in MGT.

An Ideal Business In Every Way

Owning a daily fantasy sports website grants a casino-like house advantage plus every conceivable benefit of the internet. Daily fantasy sports is based on rakes, fees, and other recurring subscriptions at no risk to the owner, while the customers assume all of the risk. Plus, the internet reduces the cost of doing business to almost $0 aside from programming fees and nominal website costs. The internet allows businesses to reach billions of potential customers, acquire them for pennies per click, customize advertising to the most specific niches imaginable, operate continuous hours, and reduce costs per additional user to $0.

Once design, functionality and legal permits are in place, MGT's task is simply to acquire customers. Any online marketing firm can take it from here. Sports offer unlimited keywords with almost no Google Adwords competition (think of the billions of keyword permutations among every athlete, team, date, arena, coach, and statistic), so good firms will lower Cost Per Click to a few pennies. Ads can be customized to every possible search (e.g. "LeBron James August 7") to direct ultra-targeted traffic to the sign-up page (e.g. "Do you think LeBron James will win on August 7? Bet now!").

If it seems as though I am depicting daily fantasy sports like a no-brainer business, and well, it is. The only limitation is the advertising budget. Dozens of daily fantasy sports websites have sprung up within the past year alone. StarStreet built its website from nothing to 1,000 users in one month.

This is a very unique time. When first mover advantage applies to every company in an industry, that industry is certainly new. Daily fantasy sports qualifies at just five years old. As I discuss in the Merger & Acquisition (M&A) section below, any website that attracts a critical mass of users could be financed or acquired within weeks.

Daily Fantasy Sports Websites

WEBSITEUSERSFINANCINGSAGE
FanDuel.comover 4M$16.2M series A-C4 years
DraftKings.com1M$1.4 seed, $7M series A1 year
FanThrowdown.comundisclosed65% acquisition at $4M valuation1 year

There are currently 35 million traditional (season-length) fantasy sports players spending an average $95 per year on fees. Billion-dollar capital fund Atlas Venture forecasts that daily fantasy sports will eclipse this traditional segment in 5-7 years. This translates to 2,000% growth: daily fantasy sports generating over $2 billion in fees by 2020 versus $50-$100 million today.

Bear in mind, the #1 daily fantasy sports website with the vast majority of users, FanDuel.com, is valued around $60 million today. Its valuation would climb 2,000% to maintain the same proportion in a $2 billion industry. Imagine the growth of MGT's FanThrowdown.com under the same circumstances.

Escalating M&A Justifies Valuation, Provides Liquidity

As I detailed in my earlier article, MGT acquired 65% of FanThrowdown.com for $2.58 million in a mostly stock deal (actual value to fluctuate with the price of MGT stock). I believe MGT will double the value of this asset by Christmas. Look at the escalating M&A in the sector.

  • Nov 12, 2007: FanDuel.com is born
  • Jan 2009: FanDuel.com raises $1.2M series A financing
  • Mar 2010: StarStreet.com raises $250K seed capital
  • Feb 2011: StarStreet.com raises $600K seed capital
  • Sep 7, 2011: FanDuel.com raises $4M series B financing
  • Apr 2012: DraftKings.com is born
  • Jul 19, 2012: DraftKings.com raises $1.4 seed capital
  • Jan 30, 2012: FanDuel.com raises $11M series C financing
  • Apr 22, 2013: FanThrowdown.com acquired at $4M valuation
  • May 6, 2013: DraftKings.com raises $7M series A financing

MGT closed its 65% acquisition of FanThrowdown.com this week. Once everything settles, the website might need some minor tweaks, but it is mostly off to the races. MGT is bringing cash to FanThrowdown.com (likely this startup's first time having a substantial advertising budget), and MGT's first task is to hire a digital advertising agency, place ads online, optimize, and usher customers in the door.

The only difference between Fanthrowdown.com at a valuation of $4 million versus $8 million is the number of users. The task, therefore, is as straightforward as any business owner could possibly dream. Buy ads, incentivize with coupons, and drive targeted traffic to the sign-up page.

FanDuel.com Vs. MGT's FanThrowdown.com

There is no fundamental difference between the #1 website in daily fantasy sports (FanDuel.com) and MGT's website (FanThrowdown.com). The only meaningful differences are soft points like ease of use, betting types, number of users and general scope of services. Will FanThrowdown.com overtake FanDuel.com? It does not matter. Again, daily fantasy sports is not a contest with only one winner. All of the major sports corporations (Disney (NYSE:DIS), News Corporation (NASDAQ:NWS), Comcast (NASDAQ:CMCSA), Time Warner (NYSE:TWX)) are participating and opening their checkbooks. Casinos are gearing up for daily fantasy sports bets for the upcoming football season. The liquidity and growth in the sector are unparalleled.

The only race in this sector is the race for more users. If MGT can acquire a user for all-in costs under $5 (very reasonable given low competition for niche sports keywords, discussed above) and the average user has a lifetime value of $25, the business is a no-brainer at nearly infinite scale. Whatever the specific numbers, everything is driven by raw metrics. So there are no lingering questions. Optimize, and acquire as many customers as possible. Go.

It is this simplicity that gives me confidence in MGT's ability to double the value of its 65% stake in FanThrowdown.com by Christmas. Once it hires an advertising agency (within the next few weeks), the campaign to acquire customers will begin. Then the user base grows, and people place fantasy bets. Given the minimal competition in a massive and growing sector, FanThrowdown.com's growth rate should be exponential.

My Wish List for MGT Management

  1. Provide an update on the closing of FanThrowdown.com this month. It would be great to know current metrics about user base size, average LTV, and average CPA, although these figures will likely remain confidential.
  2. Update shareholders on Digital Angel. Specifically, will this division be focused on developing more offerings within FanThrowdown.com (more sports, more betting types, more interactivity between users)?
  3. Hire a digital advertising agency to drive cheap, targeted traffic to FanThrowdown.com's sign-up page. Test, tweak, and ramp up the budget.
  4. Distribute coupons and advertisements. Build a huge brand for FanThrowdown.
  5. Keep up settlement negotiations surrounding the pending lawsuit, especially with WMS (NYSE:WMS) and Scientific Games (NASDAQ:SGMS).
  6. Collect cash from MedicSight patents.
  7. BONUS: License an off-the-shelf offering for another company that wants to offer daily fantasy sports (whitelabeled website or mobile app).

Risks

  • No Moat

Although corporate moats are usually great, this industry is too young for moats. Daily fantasy sports is a free-for-all. Get as many customers as you can. There are still millions left.

  • Low Barrier to Entry for Competing Websites

As I mentioned above, new daily fantasy sports websites are born every week. However, there is so much money available (both from customers and venture capitalists) in daily fantasy sports that competition is not the problem. Again, there are 35 million traditional fantasy sports players today, and the #1 website for daily fantasy sports only has 4 million users. In young industries with exponential growth, demand is unlimited.

  • Legal Complications

We know that daily fantasy sports are currently legal in 45 states and benefit from a preferential carve-out under the 2006 Unlawful Internet Gaming Enforcement Act. As I wrote in a prior article, according to the U.S. District Court for the District of New Jersey in Humphrey v. Viacom, fantasy sports games involve predominantly skill because of the complex nature of the games' strategies and the negotiations that occur among team owners. There is always the general risk of increased taxation or a legal overturn of this carve-out.

  • Losing to a Competitor

FanDuel.com and DraftKings.com are MGT's top two competitors. The race to acquire users and ramp up advertising campaigns is happening right now. As MGT's team at FanThrowdown.com knows very well, this is the time to sprint or be trampled.

Disclosure: I am long MGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.