Amaya faces tough reality

If Amaya’s unstoppable ascent to a giant of the online gambling world has so far seemed surreally untroubled then last week’s Q3 results was its first major shock. A profit warning sent the stock on a downward spiral that saw it drop CA$1bn (£490m) in value and questions begin to be asked over its long-term strategy.

In the space of just a day its share price fell by a third, wiping over $1bn from its valuation, and by Thursday morning it had fallen below the pre-acquisition price for the first time. If this was William Hill or Ladbrokes it would have been front page news.

In the 12 months since Amaya announced its acquisition of PokerStars its share price rose to a peak of nearly CA$40 in November 2014 before settling around the CA$30 mark. But by the end of last week, despite a small rally, it was CA$21.81.

Investors were reacting not just to the profit warning, but to questions over its growth prospects, not least around a delay to roll-out the firm’s sportsbook which was previously billed as the biggest revenue growth opportunity for the firm. Amaya noted it had made a “recent strategic decision to delay the roll-out of significant aspects of our new online sportsbook offering across geographies while we enhance the consumer product experience and complete the product offering”.

As a result sportsbook is expected to contribute $67m less than previously predicted for the year and rumours are already beginning to swirl that Amaya is plotting an acquisition of a technology platform to speed up its progress in the vertical. Sportsbook development has so far been in-house, but with so many fires to fight in terms of regulatory adjustments and casino roll-out it may need to seek external help.

Buy or build?

The firm fuelled acquisition speculation by announcing it had created a “Base Shelf”, which will enable it to raise up to $3bn to “maintain financial flexibility”. An obvious implication of this is it may be considering acquiring a sportsbook platform or operator, with the former presenting a more compelling business case.

Buying a sports betting operator would seem to be dilutive in value terms when Amaya is focused on using its massive database to expand into new verticals, although an established sportsbook platform could give it an immediate boost. But it’s fair to say that despite all this, sports betting is perhaps the least of Amaya’s problems right now.

And it’s worth noting Amaya rejected speculation in its conference call with CEO David Baazov saying: “There’s nothing currently that I’d say is in pipeline that we’re looking to buy. The purpose for the shelf is, first of all, it’s a legal obligation that we have to two major shareholders in terms of GSO and BlackRock, and there’s no planned secondary there.”

The biggest factor hitting revenues in the period was FX movements with a strengthening US dollar – the primary currency of PokerStars – a real thorn in the side during the period. Amaya said the decline of many currencies against the dollar led to a 19% drop in value of customer purchasing power over the period with key territories of Russia, Brazil and Eastern Europe particularly badly hit.

Over the full year Amaya said it expected currency fluctuations to contribute a $331m hit to revenues. On a constant currency basis, and normalising for VAT costs and market exits in Portugal and Greece, it said total revenues were up 19% in the quarter and 20% for the year-to-date. And that growth was mostly down to casino.

Cashing in a jackpot

Casino was always likely to be the easiest win for Amaya with the proven cross-sell between the two verticals, and the roll-out of a still fairly limited product has had an immediate impact. Revenues from its casino product were 14% of total revenues in Q3 at around $45m, which is comparable to bwin.party casino revenues in the same period.

PokerStars is yet to launch a full web or mobile product for casino and there should still be some considerable upside for that product as it improves in quality and marketing steps up a gear. But it’s also worth noting that once PokerStars is competing with established European operators for new customers, rather than cross selling to its existing poker database, it may find margins sliding considerably.

There is also the question of whether the firm is robbing Peter to pay Paul with its casino growth, as poker revenues were far less impressive during the period. On a constant currency basis they grew by 4.5% and are up 10% on the year-to-date, but with a previously stated aim of doubling the size of the poker market in the next five years it’s safe to call it a slow start.

The launch of Spin&Gos was likely responsible for the majority of the growth, and the recreationally-focused product has had a dramatic impact on the business so far. Its core product has switched from the more lucrative, but pro-friendly, cash games to a theoretically easier sell of tournaments.

Alongside this we’ve seen PokerStars make a major shift in its marketing spend with high-volume players seeing VIP rewards slashed and a concerted move to make its product more attractive to recreational players. Big changes are expected to allow software aids, and it would be no surprise to see a big upgrade to its poker product in the new year.

Growth prospects

PokerStars’ focus on marketing dollars is TV advertising, social media and brand ambassadors such as Neymar Jr and Ronaldo. Amaya is making a big bet on poker once more going mainstream and it’s a bold and potentially risky move with its core player base becoming increasingly unhappy with the shift.

But Amaya can’t afford to stand still with the wider poker market in decline and intense pressure from investors for growth in the business. Regulatory moves in Russia and continued changes elsewhere in Europe will only continue to apply extra pressure to the bottom line in 2016 and its competitors in new verticals are far tougher than in the poker space.

One area it’s also looking to for growth prospects is eSports with a new product in development to appeal to this potentially massive audience. Any launch here will be closely watched and could yet prove to be a major breakthrough for Amaya, with the potential for it to eclipse any gaming vertical expansion.

But as with everything at Amaya there are still far more questions than answers. The low-hanging fruit of immediate casino cross-sell has been snapped up and from now on things look much tougher going. The big question being not where does the growth come from, but how much growth can it achieve in the short-term?

There is no doubt PokerStars remains a hugely impressive operation with revenues and profits few others in the industry can touch, but as a growth story this latest twist in the tale means a happy ending is far from certain. It needs to quickly prove growth in poker and show progress in sportsbook alongside continuing its so far impressive progress in casino. And that is far easier said than done.