If I had to describe Amaya Gaming in one word, it would be plucky. Or perhaps scrappy. Either one will do. Circulating the gaming media now are the haranguing reports of Amaya’s $29M loss in the face of its too-rapid expansion. The prosaic conclusion is that Amaya is unprofitable, stay away from its stock. That’s the easy way of claiming due diligence without having to do any real digging.
First, let’s put the loss in perspective. Total comprehensive loss was actually $19.5M, not $29, due to the strengthening of the US dollar relative to the CAD in 2013. Most of Amaya’s revenue comes in US dollars, but is ultimately reported in CAD on the Toronto exchange. In absolute terms, comprehensive loss only increased by $11M, which is quite small for a company with a market cap of $636M. Its loss can be pinned on paper accounting practices involving amortization of intangible assets ($18M) and capital depreciation ($13M), part of generally accepted accounting principals (GAAP) but not representative of the actual money-making ability of a company.
It seems that much of the investment community realizes this, if only in the back of its mind. Since reporting its earnings, AYA has only gone down 10%, which is not bad considering the “quadrupling” of its losses. Some shareholders bought it (no pun intended), accounting for the drop, but most it seems were not fooled, or Amaya would have dropped much farther.
There are many reasons to be optimistic about the next few years. The most important one in my opinion is that it seems Amaya’s upper management knows how to play ball with the gaming keymasters, which are the government and its army of regulators. Several weeks ago I wrote about Bwin.party and its woes, essentially agreeing with previous assessments made by other CalvinAyre writers that Bwin.party’s biggest mistake was in going public in the first place.
Why doesn’t that apply here? Because in the case of Bwin.party, we have a firm playing cat-and-mouse with Big Brother. Going public with that kind of dynamic with the gatekeepers of your industry will only make you more of a target. In the case of Amaya, however, we have a company that knows how to get on the good side of the de facto rulers of the gaming industry. Amaya, with the acquisition of Diamond Game in February, is a supplier of lottery solutions for governments of all stripes. (As I’ve mentioned before, gaming laws are not in place to keep “societal morality” upheld by governments. They are there only to monopolize the gambling market for governments so they can run state lotteries at a monopoly price.) Most recently Amaya made a deal with Maryland to supply instant ticket lottery machines for its state lottery. This puts Amaya on the correct side of the divide when it comes to regulations and getting past bureaucracies. Though these considerations are rarely put to paper, they are nonetheless important.
And what about debt? I usually make a point of analyzing a company’s fixed-rate versus floating-rate debt, frowning upon companies who take on too much debt in order to expand too quickly in an environment of what I assume will be steadily rising interest rates. I came down on Pinnacle Entertainment on this issue just last week. Amaya has certainly taken on its share of additional debt in its broad sweep of acquisitions since 2011. Sure enough, the company has taken on an additional $100M in long term debt since last year, and not all of its is fixed rate by a long shot.
So why does Amaya get a pass on this? First of all, it has shown since its initial IPO a strong ability to equity finance at the right times. Since 2012, Amaya has raised $143M in private placements, which is pretty impressive considering its midcap size. That, and judging by its statements it seems keenly aware of what rising interest rates may do, and has actually calculated to the dollar what a percentage point increase in rates would do to its pretax earnings. The answer: bring it down by “approximately” (their word) $1,496,715. This is not catastrophic, and is worth the risk of taking on more debt, at least at these levels. Debt to equity is now at 30%, not bad for a company on an acquisition spree of late.
In terms of its pace of growth, I would raise an eyebrow if what I thought Amaya was doing was simply a disorganized roll-up bent on collecting a bunch of gaming industry assets and hoping they all fit together somehow. But judging by recent moves, it is clear Amaya’s strategy is planned and selective, as revealed in its $70M sale of Wagerlogic in February. In the words of CEO David Baazov, Amaya is looking to focus exclusively on business to business rather than business to consumer. In Austrian economics terms, this puts it higher on the production chain, increasing its interest profits in the long run. Interest return is seen as profit margin, or net income as a percentage of revenue on income statements, which gets lower and lower the closer you get to the end consumer. Interest return tends to increase as a company progresses higher on the production chain, so it make sense to focus one’s business on one area of that chain instead of the confusion that can result from trying to mesh together two production stages, which can disrupt economic calculation for a company.
Technically, Amaya is on a significant dip since late February and prospects look good for even a short term bounce if you are a trader rather than an investor, especially considering the uptick in money supply growth last week. (See the M2 numbers on the April 24th release.)
All in all, a scrappy company that, while it has not yet stabilized and has some work left to do, has a clear plan, is in with the right people, has shown the ability to raise significant amounts of money, and is growing responsibly.