Sheldon Adelson's Online Crusade Makes Las Vegas Sands A Sell

| About: Las Vegas (LVS)
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Online Gambling: Huge Potential Disruption

According to Juniper Research's data, mobile Internet gambling could be a $100 billion global market by 2017. From a percentage of the whole, this implies a $40 billion online gambling market size in the United States. The United States commercial casino industry in which Las Vegas Sands (NYSE:LVS) participates is a $35 billion market according to this data.

Stock Prices Will Be Affected

Online gambling could create new gambling fans who come to casinos. Or, the convenience of gambling at home could rob casinos of their appeal; how big would the market for movie theater screenings have been if there had been no VCR? Online gambling will disrupt the industry positively and negatively; the net effect is uncertain. We don't know if it will be good or bad for the stock prices of today's casino companies, just that stock prices will be affected.

Looking at the entire set of casino companies, not much can be predicted at this time. Looking at individual casino companies and their relative performance in the set, however, we have an actionable opportunity to predict who will outperform. Several factors, including quality of management, will determine which casino stocks outperform one another in the wake of online gambling. Stock investing always involves a degree of uncertainty. But there is no doubt that bad management is bad for stock prices.

Sheldon Adelson's Crusade

In general, non-online casino operators are establishing footholds to manage the negative and positive risks of online legalization. An exception is Sheldon Adelson, CEO and majority shareholder of Las Vegas Sands.

Las Vegas Sands CEO Sheldon Adelson's 'moral opposition' to online poker has kept the company stuck in neutral while rivals such as MGM Resorts and Wynn Resorts make strategic plays to prepare for the potential of legalized online play. Though Adelson appears likely to take his fight to Congress to attempt to stop the online poker movement, gambling execs on the other side of the fight see him facing an uphill (and unprofitable?) climb.

Adelson has donated over $100 million to sociopolitical causes. Political donations can sometimes function as self-interested investments, but this is not what I'm talking about. I'm talking about allocating significant wealth to the actualization of moral priorities.

Adelson claims to think separately between business and personal decisions. But how to reconcile this claim with his company's uniqueness among industry peers? Does the 78-year-old really know more about the Internet than everyone else?

[...] most gaming firms have been aggressively hedging their bets with forays into social gaming and non-cash playing options as they plan for the eventuality of Internet gambling. The outlier: Las Vegas Sands sticks to its guns that the industry is far better off with the status quo.

Given Adelson's previous moral endeavors, is it hard to imagine him directing LVS toward a futile crusade against online gambling? At best, Adelson's judgment is clouded; at worst, he knowingly prioritizes values over shareholder interests.

Nevada Governor Brian Sandoval sends a letter to Congressional leaders in support of efforts to legalize Internet poker under a federal framework. His state is the one of only a handful that have regulations in place to address online poker, but Sandoval maintains the industry has a 'borderless element' state laws alone can't address. Potential players: CZR, BYD,PTEK, GIGM, EGT, MGM, WYNN, AERL, and SHFL.

The governor of Nevada supports online gambling legalization. Do LVS shareholders (other than Adelson himself) believe that Adelson has a better idea of what is right for Nevada?

Adelson doesn't have to spend a cent of LVS cash on his moral agenda. By dragging his feet against everyone else in the industry, he is misappropriating an equally important resource: momentum. With a forward P/E of 16.96, LVS gets some benefit of the market doubt in momentum.

But LVS is not being managed for industry momentum. Forget about Macau. LVS buyers are primarily buying cash flow in the U.S., managed by someone who cares more about morals than money.

The LVS approach to gambling is like a media company trying to shut down the Internet when Napster was born. Remember when people used to say that downloading a song illegally was like walking into a store and stealing it? This was a moral argument that did nothing to protect the business in the real world. Adelson is turning LVS into Tower Records.

"Don't worry; there's plenty of time for a change in strategy if this turns out to be a problem." That's what the record companies said.

Looking at late 2008 through now, Adelson did a great job turning his company around. He has earned the right to retire now on top. But as majority shareholder, he has also earned the right to run the company into the ground. If he retires he can pursue his moral/political agenda without a conflict of interest running a publicly held company.

WYNN, which is one-fourth the size of LVS with presumably more room to grow, trades at a forward P/E only 16% above LVS. MGM has no forward P/E and trades at a price/sales one-sixth of LVS's price/sales. This is to point out that the market has not discounted Adelson's impact. Yet.

LVS has been doing some shifting with earnings dates, which could signal a disappointing call. China's growth is slowing and LVS is exposed. The market has priced in a tighter race, but Romney remains unlikely to win; Adelson is a member of the Republican Party and Romney has hinted at stricter Internet regulation -- i.e., online gambling. So I think in terms of priced-in expectations vs. risks, now is an opportunity for those who want to sell. In long-term thinking, Adelson's crusade against online gambling establishes the motivation to sell.

In the tradition of comparing CEOs to Steve Jobs, I will say this: Jobs' successor, an operations guy who is more MBA than artist, has overseen a new high in Apple's (NASDAQ:AAPL) share price. It has so far proven the right time for Apple to tone down the inspiration and focus on execution. Adelson and minority shareholders should ask themselves if his inspiration is optimal for LVS profitability. LVS holds a position of strength and simply needs to execute. I believe the company would become an attractive investment with President Michael Leven or another cool head as CEO.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in LVS over the next 72 hours. I may initiate a long position in ZNGA over 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.