Today, we deal with an intriguing question from a member of Pat McKeough’s Inner Circle about a stock in the gaming industry. Pat’s reply covers several key points that prompt us to rate a stock a high risk investment, including our view that investors should generally avoid new issues.
Q: Hi, Pat. Can you please comment on NYX Gaming Group for me?
A: NYX Gaming Group Ltd. (symbol NYX on Toronto; www.nyxgaminggroup.com) makes gaming software for over 130 online and brick-and-mortar casinos. The company is based in Guernsey (a tax haven off the coast of England), but its main subsidiaries are in the U.S., Sweden and Australia.
NYX first sold shares to the public at $3.50 each and began trading on Toronto on December 30, 2014.
The company has developed over 350 titles, including slots, bingo, lottery, poker and other casino games. It aims to create 25 to 50 new games a year. It also distributes 550 games under licence from other developers.
In addition to games, NYX’s software helps its clients manage things like player accounts and payments, currency exchange rates and foreign-language support. Recurring royalties and licensing fees account for 90% of NYX’s revenue, while advertising and other fees supply the remaining 10%.
In the three months ended March 31, 2015, the company’s revenue jumped 97.9%, to $9.9 million from $5.0 million a year earlier. However, its losses worsened to $5.0 million, or $0.15 a share, from $1.1 million, or $0.04. That’s because a big part of its growth strategy involves buying other companies, and integration costs hurt its earnings.
NYX ended the quarter with cash of $28.1 million, or $0.83 a share. Its long-term debt was $9.1 million, or a low 6% of its market cap.
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High risk investments: Constantly changing political and regulatory constraints a menace for the gaming industry
However, the company’s debt figure doesn’t include NYX’s April 2015 agreement to pay $150 million in cash for two subsidiaries of online gaming site operator Amaya Inc. (symbol AYA on Toronto). These businesses have more than 300 games and also provide other software and support services.
As part of the deal, NYX will license its entire game library to Amaya for six years. In return, Amaya will pay NYX a minimum of $12.0 million annually for the deal’s first three years and give NYX’s games a prominent place on the slot pages of its PokerStars and Full Tilt casino websites. NYX expects to close this deal in the third quarter of 2015.
Separately, the company completed its acquisition of Italy-based Game360 for an undisclosed sum in May 2015. This firm specializes in casino games and sports-betting software for mobile devices.
We see some positives with NYX: the Amaya deal provides a measure of stable cash flow; the online gaming industry is growing fast, particularly as more governments see gaming as a new source of revenue; and the market is highly fragmented, so there’s plenty of opportunity for NYX to keep adding smaller firms that enhance its existing game portfolio and expertise.
However, rapid growth by acquisition adds considerable risk. As well, the gaming industry is subject to constantly changing political and regulatory constraints.
What’s more, we generally advise against buying new issues. They come to market when it’s a good time for insiders or the company to sell, but that may be a bad time for you to buy. We don’t think NYX Gaming is an exception.
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