Posted on: September 29, 2020, 11:21h.
Last updated on: September 29, 2020, 11:21h.
Bolstered by soaring demand for gaming services and technology, GAN Ltd. (NASDAQ:GAN) could be a winning idea for investors as the US online casinos and sports betting industries expand, according to a Wall Street analyst.
In a recent note to clients, Macquarie analyst Chad Beynon says GAN is one of the preferred avenues for playing the domestic sports wagering boom, putting the stock in a pantheon alongside DraftKings (NASDAQ:DKNG) and Caesars Entertainment (NASDAQ:CZR) as prime avenues for investors looking to participate in the burgeoning sports betting arena.
GAN’s operations – it’s a cloud computing company with a gaming focus – are significantly less glamorous than a DraftKings or a Caesars. The UK-based company isn’t consumer-facing so many casual bettors haven’t even heard of it, but its products and services serve as bedrocks for gaming companies’ internet casinos and online sports betting operations.
The major features include account registration, payment processing, geolocation, acquisition and retention marketing, amongst others,” notes Beynon. “GAN also has patented technology that it licenses out that allows linking land-based patrons to internet accounts, allowing points redemptions.”
The software maker’s shares debuted in the US in May and the stock got off to a torrid start, but the name subsequently fell 45 percent from its highs as short sellers attacked the stock.
Like many cloud computing companies focusing on other industries, GAN has advantages when it comes to the all important issue of switching costs.
A base definition of switching costs are the costs a consumer takes on for switching brands. For example, a shopper moving to Pepsi from Coca-Cola deals with the spread in price between those brands. However, it’s a tougher issue in the corporate world.
Even if a GAN client can find a comparable product from a rival vendor at a lower price, the gaming firm needs to assess effort- and time-based switching costs, meaning the time it takes to install new technology platforms and the effort put in by employees to learn those systems can diminish financial benefits. Those are among the reasons some analysts and investors remain enthusiastic about GAN despite the recent weakness in the stock.
As Beynon points out, GAN has another important card it can play with clients. In states where iGaming and sports betting currently aren’t permitted, the company leverages simulated gaming software “as a trojan horse to prove to operators that its platform is superior to the competition.”
Impressive Client Roster
In recent months, GAN is rolling up a star-studded client list, including Churchill Downs’ BetAmerica platform, Cordish and Penn National Gaming’s Penn Interactive Ventures unit.
Another point for investors to ponder is margins. Beynon, the Macquarie analyst, says earnings before interest, taxes, depreciation and amortization (EBITDA) margins for US sportsbook operators can eventually get to 20 percent to 30 percent, but those figures will be higher for technology providers, such as GAN.
He has an “outperform” rating on GAN with a $28 price target, implying upside of 75 percent from current levels.