Here’s a look at tribal gaming company Bingo Nation Inc (OTCMKTS:BLTO). Do the risks outweigh the rewards and justify an exposure to this under the radar play?
Here at Small Cap Exclusive, our research team dedicates a lot of time to uncovering under the radar stocks. One of the most effective methods of doing this is to employ a top down approach to first identify an under the radar industry, and then look for candidates within said industry that represent potential plays.
There are inherent risks associated with this approach, of course. Under the radar stocks are often under the radar for a reason; specifically, that they don’t offer enough potential for return to attract mainstream attention. The same concept, a lack of return, or return probability, extends to under the radar industries.
That said, there are things we can do to mitigate these risks. Even the most niche industries are subject to industry analysis, and this analysis can be a strong indicator of potential.
So, the process goes like this:
Look for an industry that wider markets as-yet aren’t paying attention to, identify the growth potential of said industry based on available research and, if the potential for growth exists, identify a company within the industry that is positioned to take advantage of said growth.
Our team has applied this process to the Indian Gaming Industry, identified the potential of the industry based on this research and tagged a company called Bingo Nation Inc (OTCMKTS:BLTO) as well positioned in the space.
Here’s what we’re looking at.
Before we get into the company, a quick note on the Indian gaming industry – what it is and why it exists. When we say Indian gaming, we mean the industry as applied to the native tribal lands in the US, not the Asian country’s gaming industry. Because these lands are governed by way of tribal sovereignty, States have limited ability to forbid gambling in them, and this limited liability is both coded by, and overcome with, what’s called the Indian Gaming Regulatory Act of 1988. Under the act, the States retain sovereignty to create casino-like halls, but the States and natives must be in what are called Tribal-State compacts and the federal government has the power to regulate the gaming through these compacts. It’s a roundabout way for States to govern regulation, and it’s lead to a number of niche creations – one of which is the space we are looking at here, Class II gaming.
Class II gaming refers to any wager based games that resemble bingo. Basically, anything that incorporates the number selection element of bingo, be it electronic or not, and has been expanded to include non-banked card games. That is, games that are played exclusively against other players rather than against the house or a player acting as a bank.
The Indian gaming industry in the US generates $28.9 billion in annual revenues as of 2014, which is the year that the latest available data (published during 2016) details. The year 2014 represented the fifth straight year during which the Indian gaming industry expanded in the US, and the growth is attributable to (and highly correlative with) that of the US economy as a whole. In this respect, it’s no different to the traditional gaming industry in the US, which analysts expect will grow at a CAGR of more than 11% between now and 2020.
That’s the industry and its projected growth; where does Bingo Nation fit into the picture?
The first answer to this question is that it is one of the only publicly traded exposures to the Indian gaming industry and its growth. The large cap gaming names, Las Vegas Sands Corp. (NYSE:LVS), Wynn Resorts, Limited(NASDAQ:WYNN), etc., don’t offer any exposure to the space, and those that do are either very indirect exposures, like Penn National Gaming, Inc (NASDAQ:PENN), for example, or private companies, like Station Casinos LLC.
Bingo Nation is a direct Indian gaming play.
That’s not enough in itself, of course. We want to see growth potential as indicated by the company’s operations, as opposed to its industry positioning.
The company is essentially a start up in the space, having pivoted from previous operations and having spent the last six months laying the groundwork for an entry into the sector. The concept works like this – the company has developed what it calls tribal gaming kiosks, from which players can buy class II gaming “bingo” tickets. These tickets correlate with a weekly broadcast, as part of which the company plays the bingo game with an in-house live audience, and with an at-home audience. Ticketholders (i.e. those that purchased their tickets from the kiosks) watch the broadcast to find out if they have won in the draw. A number of players win per broadcast, and the winnings are dished out from a pot that is made up of the takings from the kiosks.
That’s the headline draw, but there’s also an instant win element, designed using an algorithm that allows the kiosks to circumnavigate the State gambling laws and stay within the realms of class II gaming.
It’s a reasonably simple concept, but one that that falls in line with not just the growth in the Indian gaming industry, but also with trends within the gaming space as a whole. A concert called jackpot fatigue describes that draw-based models are failing to attract younger players, and in turn, are creating a negative feedback loop as it is challenging to sustain larger and larger jackpots with a declining player base. The quicker feedback of the instant ticket lotteries is winning over players, especially at the younger end of the market. Instant ticket sales now represent 55% of lottery sales, up from 39% in 1998.
How does Bingo Nation generate revenue? The company collects its revenues from the takings that users spend on tickets, or in other words, takes a cut from ticket sales. Unlike the other side of the equation (the payout) this isn’t subject to any class II regulations, in format at least, and so the revenue generation side of the business mimics that of a more traditional lottery operator.
What developments has the company announced recently that makes this one a timely exposure?
Back in December 2016, Bingo Nation announced that it had developed a free bingo app for Android and iOS devices, based on its bingo kiosk offerings. The app is designed to mimic the functionality of the actual class II games, and serve as an educational tool with which users can learn how to play the real money games. We see this as functioning as a sort of feeder-type platform, through which Bingo Nation can funnel users towards the real money games.
This application is set to rollout before the close of this quarter, and should serve as a major catalyst as and when it hits the application stores. It should also bring with it some insight into future user interest, based on application download levels.
Mid January, the company announced that its class II proxy-player game management software and hardware had received certification from Gaming Laboratories International LLC, which is an entity that provides independent testing and inspection of electronic gaming products for regulators, suppliers, and operators in the gaming industry. This is key to being allowed to operate in the sector, and was an important hurdle to clear.
So what’s next?
The company is aiming to roll out its kiosks throughout 2017, so this provides us with two clear catalysts: the above mentioned application rollout, followed by the kiosk rollout.
What are the risks?
As mentioned, there are inherent risks with this not just being an under the radar stock, but also with it being a relatively new player in the sector. The primary risk is rooted in Bingo Nation’s as yet unproven ability to bring the concept of remote kiosk gaming to Indian gaming.
There’s also risk rooted in growth.
This is a high growth sector, and Bingo Nation is going to need growth capital if it is to meet this growth potential. Growth capital will come from equity issue, and equity issue could impact early shareholders’ stakes. Capital raising is a standard risk at this end of the market, but it’s one that needs to be taken into consideration ahead of any exposure to a company like this.