How To Play Online Gambling

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New Jersey's Atlantic City is well known for its casino's and gambling, but now that concept has been taken online. On Feb. 26 New Jersey Governor Chris Christie legalized online gambling, as long as it is affiliated with in-state casinos. Nevada and Delaware have also signed similar legislation into law. This is what boosted both Zynga's (NASDAQ: ZNGA) and Glu Mobile's (NASDAQ: GLUU) stock prices in the past month, especially Zynga's. The idea is that Zynga and Glu (who recently released a real money gambling app in the UK) will be able to boost their top and bottom line's by tapping into the huge real money gambling market in the US. Glu already is entering the UK gambling market, and Zynga is planning on offering real money gambling games on Facebook's (NASDAQ: FB) online platform.  

On a side note, this would help Facebook keep users interested in its website, as gamblers would come to the website to have fun for long periods of time, and Facebook's news feed could keep your friends updated on your wins and losses. Facebook has been hit with "Facebook fatigue" recently, and needs something to keep users interested. Facebook could also make some money off of this by taking a little bit of the gains that Zynga would make, and by offering highly targeted ads towards those playing poker a lot. More women than men play online poker, so you also could provide a strong advertising opportunity towards that demographic as well.

Glu is currently working with Probability (a UK company) to create a suite of casino apps, and Zynga has applied for a gambling license in Nevada (Nevada's online gambling legislation is a lot less strict than New Jersey's). While Glu hasn't been pursuing the US gambling market like Zynga has, one can assume with the recent legislation they will be releasing apps for real money gambling pretty soon for the US. The question is, will this help turn around Zynga's and Glu's stock prices, or will they continue their decline after the excitement calms down?

The US Gambling Market 

The US commercial casino market is a $34 billion per year market, with a lot of gambling happening in Las Vegas ($6.069 billion gambled a year) and Atlantic City ($3.318 billion a year), according to the American Gaming Association. This is a very bullish sign for online gambling, as these are the 2 states that just legalized online gambling. Keep in mind that Zynga's 2012 revenue was $1.281 billion, and it was $81.69 million for Glu Mobile. If they can get into this market (especially Zynga, as they have already applied for the license), they will dramatically boost their growth rates. This will cause revenue and profits to go up, investor sentiment to change to a bullish stance, PE expansion, and their stock prices to go up. All very good news for shareholders. It is hard to predict how much extra revenue will come in, but if the UK is any indicator, it will be a lot. In the UK, where online gambling is already legal, online gambling is expected become a $3 billion a year industry in 2013, and will grow by 34% over the next 4 years in Europe. Zynga already has a large fan base for its online poker game in the US, so I would expect it to take one of the largest market shares in the online real money poker industry in the US.

Other States

Nevada, New Jersey, and Delaware, have all legalized online gambling recently. Two other states, Illinois and Pennsylvania, are also considering passing similar laws. If they do, then expect a large run up in Zynga's stock price and a smaller bounce in Glu Mobile. I assume that Illinois will pass its law, because Governor Pat Quin (Democrat) said he would pass gambling expansion under the "right conditions." So far the bill has passed the Senate Executive Committee by a 10 - 4 margin. Keep in mind both state legistative chambers are controlled by the same party, as is the governor seat, so that makes it much easier to pass legislation. In Pennsylvannia it will be a much harder road, as the party that controls the state government (Republican) is proposing a law to ban online gambling, while the party that isn't in control is doing the opposite. It's still to early to see how this plays out, but it won't be easy.

Final Thoughts

If you had told me Zynga and Glu Mobile were worth looking into a few month ago I would have laughed at you and pointed towards their valuation and terrible stock performance. But now that the times are changing, it seems these stocks are worth taking a look at. It isn't just the US gambling market to look at--they also are moving into international markets as well. The UK market is growing fast and offers a lot of potential to these two companies. But the UK already has a lot of competition, so the US will offer the biggest rewards and the biggest chance to gain a lot of market share, as long as Zynga and maybe Glu Mobile can get a first movers advantage. It will be interesting to see how these stories play out and would probably be worth taking a small speculative position in these stocks. Already Zynga and Glu are up big, but larger gains lay ahead.

Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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