How To Profit From The Online Gaming Craze

| About: MGT Capital (MGT)
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MGT Capital Investments (NYSE: MGT) is a holding company that's making an aggressive foray into the thriving business of online daily fantasy sports.

This small-cap company is in the vanguard of the booming online gaming industry, with a bold business strategy that could pay off big for investors.

In April, MGT purchased a 63 percent stake in FanTD LLC, an online daily fantasy sports business operating the website MGT ponied up $202,500 in cash plus 600,000 shares of restricted stock, a deal that valued FanTD LLC at about $4 million.

MGT formerly owned a portfolio of legacy patents, which it has now sold. On June 4, MGT announced that it had signed an agreement with a large Asia-based conglomerate to sell its portfolio of medical imaging patents. The sale of these patents marks the completion of MGT's transition to a company solely dedicated to online gaming.

With a market cap of $26.9 million, $7 million in cash on hand and no debt, MGT intends to devote its war chest to increasing the size of's user base, the exact number of which is not publicly available.

MGT also will launch a marketing campaign to enhance the site's brand awareness.

On June 12, MGT announced the appointment of Mike Levy as a senior strategic advisor for Levy is the founder and former CEO of (now, a leading sports media company. Levy will spearhead MGT's marketing efforts.

Not surprisingly, MGT isn't alone in this niche. The two biggest fantasy sports competitors, and, also plan major campaigns this year to capture market share. and are additional competitors.

The stakes are high, with a potentially huge payoff for investors. If you think online gaming is just for geeks, think again. Online gaming of all types is big business and it's getting bigger. It's one of the fastest-growing segments of the global technology sector and the pastime's popularity is exploding.

According to the latest available statistics from research firm NPD Group, Americans now spend an average of 8 hours a week on online gaming, up from 7.3 hours in 2009.

Moreover, online gaming is no longer reserved for just the young. Nearly 50 percent of gamers are between the ages of 18 to 49 years. Indeed, the average gamer is now 34 years old. Surprisingly, women account for 40 percent of the market and their share is growing every year.

One of the hottest aspects of online gaming is fantasy sports.

The Fantasy Sports Trade Association (FSTA) estimates that 35 million online gamers in North America bet money on fantasy sports. Conventional fantasy sports drafts typically endure an entire season, which often seems an eternity for online gamers in our short attention span culture.

Daily fantasy sports give gamers a daily fix: draft a team, place a wager, and if you win get paid, all within a single day. Bettors can compete against a single rival, or against several within a league. Available leagues encompass the entire panoply of sports, including the NFL, MLB, NBA, NHL, and NCAA.

According to the research firm IBISWorld, the fantasy sports industry over the past 10 years has racked up phenomenal absolute growth of 241 percent. From 2007 to 2012, the industry grew at an annual rate of 12 percent.

IBISWorld estimates that the industry will grow at a rate of 8.8 percent over the next four years, reaching $1.7 billion in annual revenue by 2017.

Lady Luck Meets Lady Justice

If the legal system is kind to MGT, the company could soon reap a multi-million dollar windfall that would allow it to plow even greater sums into

MGT filed litigation in November 2012 against a "who's who" of gaming companies: casino industry stalwarts Caesars Entertainment Corporation (NASDAQ: CZR), MGM Resorts International (NYSE: MGM), and Penn National Gaming (NASDAQ: PENN), as well as slot machine manufacturers WMS Industries (NYSE: WMS) and Aruze Gaming America.

The complaint alleges that these companies violated patent rights owned by MGT. The company is seeking injunctive relief and royalties for patent infringement, as well as damages for all prior acts of infringement.

As MGT awaits the court's decision, the competition isn't standing still. The big boys of entertainment know a lucrative trend when they see it.

Comcast (NASDAQ: CMCSA), News Corp (NASDAQ: NWS), Time Warner (NYSE: TWX), and the ESPN subsidiary of Walt Disney Co (NYSE: DIS) are all muscling into this growing entertainment phenomenon.

Notably, Comcast, the nation's leading provider of cable and communications products and services, has teamed with various entertainment companies to offer premium gaming services as part of its pay cable package.

This year, Comcast Ventures, the venture capital arm of Comcast Corp, led an $11 million Series C round of financing in, the largest daily fantasy website. Also this year, venture capital fund Atlas Ventures spearheaded a $7 million round of financing for, another major player in the daily fantasy sports arena. According to Atlas Ventures, daily fantasy sports will generate $2 billion in fees by the year 2020, compared to less than $100 million today.

To be sure, MGT faces risks and formidable competitors, but its investment in could be a big home run for investors who get in early, especially if MGT wins its lawsuit. The judge's decision could come at anytime.

Meanwhile, MGT is engaged in a high-tech but elegantly simple business. Owning a daily fantasy sports website confers many of the advantages of owning a casino, including excellent cash flow and statistical odds that heavily favor the house.

Daily fantasy sports revenue is based on fees and recurring subscriptions, with no risk to the company. Moreover, operational overhead costs are negligible, because all business is conducted over the Internet. MGT is now investing in a more robust, multi-user web platform. Once that's installed, MGT's goal is to simply rake in more users.

It speaks well of the company that insiders own a lot of MGT's stock. CEO Robert Ladd holds roughly $2 million, for 11.2 percent of shares. Other insiders own an additional 5.8 percent of shares. Investors should be heartened by the fact that top management has put skin in the game, so to speak.

In remarks to the media in April, Ladd recently elaborated on his strategy for the company:

"It is hard to overstate the potential we see in legal online gambling, both now and in the near future, as states continue to relax prohibitions in pursuit of tax revenue," Ladd said. "Betting on fantasy sports is legal in nearly all states and has a preferential carve-out on the federal level under the Unlawful Internet Gambling Enforcement Act of 2006. [MGT's comprehensive strategy] is to add other games of skill over the next several months, with an emphasis on mobile applications and secure technologies."

Despite its excellent growth prospects, MGT still faces formidable hurdles. First and foremost, the company could actually lose its lawsuit, which would deprive it of much-needed capital. A loss in court wouldn't necessarily be fatal, but it would make it easier for the company's deep-pocketed competitors to shunt it aside.

Nonetheless, for aggressive investors willing to shoulder some risk, MGT Capital offers the potential for huge returns. If the lawsuit goes the company's way. the stock's price should get an immediate boost.

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. I have no business relationship with any company whose stock is mentioned in this article.