Between January 8 and December 30th 2016, the Dow Jones Gambling Index (INDEXDJX:DJUSCA) rose from $497 to $699—a gain of 40%. By contrast, the Dow Jones Industrial average returned about 20.7% in the same period—about half the gain that gambling stocks witnessed.
It’s clear that gambling stocks had a good year in 2016. Delivering nearly twice the return of the DJIA and experiencing soaring revenue growth, the gambling industry was one of the top performers last year. Although the 2008-2010 recession left the industry in rough shape, burdened by debt and declining Casino attendance, it’s clear that Vegas has come back in a big way.
But for all the success of the gambling industry as a whole, there is one sub-sector within gambling that’s in an even better position.
Native-American gaming (casinos and other gaming enterprises owned by Native American tribes) enjoys all the advantages of the broader industry, PLUS a few special circumstances that Vegas can’t boast. Specifically, it benefits from some regulatory and tax exemptions that make it much easier for these companies to maneuver the tricky legal landscape of the gaming industry.
Unfortunately, until recently, it has been difficult for individual traders to invest directly in Native American gaming. Although the big Vegas companies, like Las Vegas Sands Corp. (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) have some exposure to Native American assets, these stocks are not direct Native American gaming plays. This makes these stocks less-than-ideal for investors who are specifically seeking out the benefits of Native American gaming stocks (e.g. favorable regulatory and tax treatment).
Take BingoNation (OTCMKTS: BLTO) as an example, the Native American gaming play just might be the play investors have been waiting for. As a Class II Company under the Indian Gaming Regulatory Act, BLTO is an opportunity to invest directly in Native American gaming, as opposed to indirectly through a larger conglomerate like LVS or WYNN.
But first, it pays to look at the performance of the gaming industry as a whole and why it has been such a consistent return-maker for investors over the past 14 months.
U.S. Gambling Stock Performance, 2016
2016 was a great year for gaming stocks. The Dow Jones Gambling Index (INDEXDJX:DJUSCA) returned about 40% that year, beating the market by nearly 100%.
That’s strong performance as it is. But while the gaming sector as a whole performed well, the more interesting story is individual gaming stocks—some of which outperformed the market by absolutely eye-watering margins.
As the chart below shows, Scientific Games Corp (NASDAQ: SGMS) delivered a return of 145% between March 3, 2016 and March 2, 2017—nearly 7 times the Dow’s return in the same period.
International Game Technology Inc (NYSE: IGT) is up about 80% between March 2016 and March 2017.
Galaxy Gaming Inc. (OTCMKTS: GLXZ) is a “penny stock” in the gaming space that has delivered a 167% return over the past year (see chart below).
BLTO’s special legal status—and what this means for investors.
But perhaps the biggest advantage BLTO has going for it, is its status as a Class II game under the Indian Gaming Regulatory Act. BLTO is considered a Native American gaming company—which means that it has a number of regulatory and tax advantages that other gaming companies don’t have.
What are these advantages?
First, the regulatory burden on BLTO is much laxer than that of non-native gaming companies. Under federal law, Native American Tribes are considered sovereign—that is, free to regulate their own activities in a way that states and other U.S. territories are not. As a general rule, Native American Tribal enterprises are exempt from laws and regulations that affect other companies. For example, Native American tribes are allowed to own and operate casinos in states where casinos are otherwise illegal.
But perhaps even more importantly, Native American gaming companies are not subject to federal tax. This means that Native American gaming companies keep a far larger share of their profits than non-Native gaming companies do. Let’s say you have two companies, Company X and Company Y, that bring in an identical level of pre-tax profit: $20,000,000.
There’s just one difference: Company X is a native gaming company operating on tribal land, while Company Y is a regular Vegas corporation operating on the strip. In this situation, Company Y will have to pay the top federal corporate tax rate of 35%—knocking $7 million off its $20 million pre-tax profit. Company X, being a native enterprise, will not have to pay this tax.
Management’s revenue and profit forecasts.
Before getting into management’s revenue and profit projections, it helps to look at BLTO’s business model.
BLTO’s business is based around a TV Bingo Game. Customers purchase tickets for the game at self-serve kiosks, which will be set up mainly at Casinos on Indian lands.
BLTO’s management is projecting:
- 3000 self-serve kiosks installed on Indian lands across the country.
- 15 million anticipated card sales per week.
- Average sale value of $2 per card.
- ~$30,000,000 total weekly revenue.
- ~$15,000,000 paid out to winning cardholders.
With profits shared evenly between winning card holders and BingoNation, that leaves approximately $15,000,000 in weekly revenue to the company. Granted, there are some other operating expenses (marketing, TV show, kiosk maintenance costs). However, the prize payout will be the only major recurring cost to the company, leaving approximately $15,000,000 per week—or $780,000,000 annually—in net profit.
The Bottom Line For Investors
Until now, quality Indian Gaming plays have been a rare find for investors. Although some of the big Vegas stocks (WYNN, LVS) have some exposure to the Indian gaming space, these are not direct plays.
BLTO is one of the first opportunities for regular investors to invest directly in an Indian gaming startup, and reap the regulatory and tax advantages that come with that.
Investors looking for a direct play in the Indian gaming space should seriously consider BLTO. Although the stock is relatively new and revenue is not yet established, the company’s business model is sound and its management experienced. The company has pursued an innovative marketing strategy, with TV coverage and celebrity endorsements sure to generate interest in the company’s flagship game and TV show.
I believe BLTO to be a solid long play for investors interested in high-alpha gaming stocks. I believe it will outperform not only other gaming stocks, but the market (as measured by DJIA performance) as a whole. Although the stock is not without risks, the potential upside, as measured by management revenue and profit projections, is considerable.