International Game Technology Senses Fortune As More States Embrace Online Gambling

| About: International Game (IGT)

The number of states allowing online gambling in the U.S now stands at three, following the addition of New Jersey. Initially it was Delaware and Nevada. New Jersey's first virtual casinos went live late November last year, and reports now indicate that State Senator Raymond Lesniak is plotting to attract foreign companies to join local based players in the online gambling market. On the other hand, Caesars (NASDAQ:CZR) CEO, Gary Loveman says the company is pushing for federal legislation that will legalize virtual casinos in every state.

International Game Technology (NYSE:IGT) has expressed its excitement on the current developments in online gaming in the U.S. The company designs, develops and manufactures gaming systems and platforms for both casino slot machines, and online content for placing bets in partnership with the various gaming companies. The looming growth in the online gaming market in the U.S presents an interesting opportunity for the company, which could play a major role in its growth strategy.

The thought of having more foreign online gambling companies setting shop in the U.S means more business for the Media & Graphics software company. On the other hand, as more states embrace online gambling, this also creates an opportunity for new entrants in the market. It is cheaper to set up and run a successful online gambling company than introducing slot machines in a market already dominated by veteran players.

The Opportunity

New Jersey is the third state to legalize online gambling in the U.S. The State's leading gaming city, the Atlantic City has seen about 40% decline in casino revenues since the 2006 peak. The State approved a list of companies to practice online gambling with its boundaries recently, setting itself up for a potential recovery over the next few years. According to reports, New Jersey aims to become the online gambling capital of the world, as its Senator pushes to attract more foreign companies to the State.

According to the approval list, it is clear that several companies could find themselves eligible to conduct online gaming business in the U.S. A good number of these are already involved in other businesses including land-based casinos and telecommunications. For them it will be a matter of expanding their current business, which gives them a head start ahead of the new entrants.

Some of them like Caesars and 888 Holdings, and Borgata & have already received transactional waivers, while Paddy Power and Betable among others are deemed eligible for transactional waiver. These incentives should make it easier for the companies to venture into the market in New Jersey, thereby maximizing IGT's business opportunity.

This opportunity adds to the current one, already present in Nevada and Delaware, as major entertainment resorts expand their businesses to the online community. For instance, MGM Resorts (NYSE:MGM) has collaborated with the world's largest publicly traded online gambling company to venture in the industry. Jim Murren, the CEO of MGM Resorts, which owns one-third of Casinos in Las Vegas Strip is very bullish about the potential of online gaming in the U.S. He also co-owns the Borgata, one of the most successful casinos in New Jersey. Murren said that MGM Resorts is buying into online gambling because of its brands, Bellagio, MGM and Ario, which resonate with people on poker. MGM Resorts and Caesars are some of the largest Resorts & Casino companies embracing the expansion to online gambling.

However, some are opposed to the move. Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) are against the push for the legalization of online gambling in the U.S. Currently, the odds seem to be on their side with 47 of the 50 U.S states reluctant to embrace online gambling. They all have different reasons though. For instance, the CEO of Las Vegas Sands questions the morality of online gambling. He fears that virtual casinos could lure children online and cause long-term gambling addictions.

However, as Murren puts it, "Technology exists to make sure that you know who is [betting online], whether they're of age, whether they already have addictive behavior, whether they're in a jurisdiction in which it's legal to gamble." "Our company wants to be the kind of company that regulates this, that provides safeguards for the right type of people that can gamble. I think it's a great source of tax revenue for states-and I think we should do it," says Murren.

Wynn Resorts CEO, Steve Wynn on the other hand claims that he just does not see the opportunity as claimed by his colleagues and rivals.

Some of the big casino companies may opt to take a back seat, but to some new entrants, the opportunity is massive and worth going for. For instance, new start-up SeanieMac International (OTCPK:BETS) is already gaining traction in the industry. It is one of the few pure online gambling companies traded in the U.S. While it attracts various risks common to micro-cap stocks, SeanieMac is attacking the market positively by engaging reputable partners in its quest to become a notable player in the industry.

The Irish-based company recently established a $600,000 credit line, which it is using to drum up its marketing campaign. Just like any other online gambling company, marketing is key towards gaining market share. SeanieMac has signed up deals with a major online publisher, the Irish Mirror, as part of its strategy to reach out to sport booking and casino gamblers, among others.

In the company's December quarter, the amount staked over by gamblers increased by 72% to $1.9M sequentially. The company's total turnover since inception in April 2013 stands at $3.4M. It has improved sequentially month after month.

Now, looking at New Jersey's approval list, there are several companies that could benefit by employing the same tactic. Many companies use reputable online publishers to drive the marketing campaign; Paddy Power uses, while BSkyB's Sky Bet uses all its online publisher websites to reach out to gamblers. I believe with the looming growth in online gambling in the U.S, we could see more of such deals as companies push for market share.

Why IGT Is Optimistic on Online Gambling

My point is, in every bit of success in the online gaming market, IGT should be able to profit as well. The designer and developer of the online gaming platforms and systems, which calculate the payout for every single bet, should grow its commission-based revenue too. The more companies come in, the more systems the IGT will be required to develop. Additionally, the more bets, the larger the market grows. It is a win, win situation for IGT, and this explains why the company publicly announced its delight on the news that, New Jersey moved to legalize online gambling. IGT announced via a press release that it was primed for online casino wagering in New Jersey fueling excitement on New Jersey's legalization of online gambling.

Approximately 69% of the company's sales come from slot machines, while gaming systems contribute about 19%. The latter metric could improve following the latest events, as more companies expand to online gambling, while new entrants also get into the market. IGT benefits by charging a service fee on the amount wagered, as gamblers place their bets.

Now in fiscal year 2013, the company generated 78% of its revenues from operations in North America, while 22% came from international operations. Therefore, when land-based casino companies expand to online gambling in the U.S, this could boost the company's revenue potential significantly, considering its presence in the region.


The online gambling market is expected to grow by approximately 7.1% through 2020 globally, excluding the U.S. However, with the latest developments in the U.S online gambling activity, the figure could rise to double digits, as more companies set shop in the U.S. Furthermore, there is still the possibility of more states legalizing the business, which could open more doors for players new and old to set shop. As the market grows, IGT will have nothing to lose. It is like a broker, who earns a commission on every trade. Now, add that to new systems that it could build, and you have a company that is definitely sensing fortunes as more states embrace online gambling in the U.S.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.