Should You Gamble on These 2 Stocks?

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you are looking to invest in gambling, you should consider an alternative to the traditional investment in Las Vegas Sands, MGM, or Wynn: online gambling. Zynga has been busy getting into the real money market, but it's still largely uncertain. So, how should you balance an investment in these two companies? Below, I provide an outlook on both Zynga and the physical casino stocks…

Las Vegas Sands (NYSE: LVS): Bears Should Stop Blasting Macau

LVS has struggled in recent months from growing concerns over deceleration in Macau. In my view, the pessimism is largely unwarranted, and this was evident in the recent quarter. Macau saw gaming revenue soar 19.3% in the third quarter, which was an acceleration over the 14.3% rate achieved in 2011. Perhaps more importantly, market share expanded 35% in October with corporate growth exceeding that of the market. This continued into November when gambling revenues rose 7.9% y-o-y. And Nomura is now reporting "encouraging" 15% y-o-y growth in Macau gaming business for the month through Dec. 16. It further anticipates double-digit growth in VIP revenue, which will be a major relief to anxious Macau bulls.

Table productivity has also improved 26% y-o-y in Macau with $8,700 in winnings per mass table. An impressive 3,660 hotel rooms have been added in Macau since April 2012, and 2,000 more will be added in January 2013. It is further showcasing confidence in Macau through the development of Parisian Macau, which is awaiting government approval and expected to open by 2012.

At 26.7x and 17.6x past and forward earnings, LVS trades at a reasonable valuation against Wynn's (NASDAQ: WYNN) corresponding figures of 21.5x and 18.6x. LVS is, however, forecasted to grow EPS by 20.3% by 2016, which is nearly 50% more than the expected rate for Wynn. Assuming Wynn meets expectations, 2016 EPS will come out to around $9. At a multiple of 16x, this translates to a future stock value of $144 for an average stock return of 7.4% when you factor in dividends. I believe that investors are much more likely to chase the steeper growth curve at LVS, especially since the company's asking price isn't that much more expensive.

Zynga (NASDAQ: ZNGA): A Future in Online Gambling?

Zynga represents what could very well be the social media face of gambling. The idea of online gambling is not a new concept; sites like TopBet and Win Palace Casino have been around for some time. However, online gambling has yet to have such social media spin that Zynga could contribute. But when should we expect Zynga to go live with its real money gambling sites? The company is evidently about to launch online gambling in the United Kingdom by early 2013: see here and here.

I know it seems like a minor point, but it's the latter site that particularly intrigues me. Whoever designed it deserves a large paycheck. As you can see, the background depicts the shadows of cartoon characters. It's creative, fun, inviting, and perfect for smartphone owners. Joe Camel would be proud. It's no secret that, though gambling is banned for those under 21, it can be, and has been, easily accessed by minors. But I don't think something sinister is at work here; rather, I think Zynga is trying to build upon its social media character. In this regard, the company is also highly successful. Online gamblers have plethora of options but nothing really distinguishes one site from the next. With a strong early-mover advantage in games for smartphones, Zynga can leverage its reputation to take away customers from the top online gambling leaders.

Zynga has also been busy filing paperwork in Nevada to launch a gambling business. It has already created pent up demand through the launch of free gambling titles, like Elite Slots, Zynga Slots, and Zynga Poker on Facebook. Another distribution the company has going for it: Synacor. Zynga recently signed a deal with the pay-TV company to promote Zynga games on user homepages of the latter.

Yet competition is still intense at the core business. The stock fell 7.5% in early December off of news that Zuckerberg held a special meeting with game developers where the idea of having a sliding scale royalty fee that would benefit smaller developers was floated. Zynga was not in attendance. So, while the core business has been eroding, online gambling may very well come to represent nothing short of a second life.


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