A recent write-up on VIC describes Amaya – the new owner of PokerStars – as a high-quality and high-growth business. As a former professional poker player I have literally played millions of hands at PokerStars and I know firsthand how awesome they are compared to the competition. They have the best software, the best customer support and perhaps most important: they are reliable. Because of that (and being “flexible” in interpreting US laws) they have grown to be the biggest site, and I think it is unlikely that they will lose this position since running an online poker site is a business with strong networking effects and economies of scale.
As a poker player you want to play on the site where you can find the widest variety of games running at any time of the day. At the same time attracting new recreational players is one of the biggest expenses that new (and existing) sites incur, but as the biggest site you can spread your advertising costs over a larger number of customers. So I’m agreeing with a large part of the thesis that the author of the write-up summarizes as follows:
In what amounted to a back-door IPO for the dominant global player in online poker, The Rational Group—owner of PokerStars and FullTilt Poker—was acquired (closed August 1st, 2014) by Amaya, a B2B gaming solutions provider one-tenth its size. While the headline EBITDA multiple appears reasonable given online gaming comps, the true proforma profitability of the business is not widely understood: minimal taxes and CapEx means that virtually all of the EBITDA not consumed by interest becomes free cash flow. Given this, Amaya’s current $28 share price implies a 13x multiple on our estimates of 2015E FCF, which we view as very cheap for a company that dominates its global market (>60% of online cash poker games) and has been growing rapidly (PF 20% 3-yr revenue CAGR & PF 42% 3-year EBITDA CAGR). Moreover, we expect strong FCF growth to continue over the next several years through: (1) the addition of online casino games and sports betting to its poker brands; (2) organic growth of their existing offerings in this rapidly growing market; (3) balance-sheet deleveraging; and (4) expansion of their online poker brands into the US.
At the same time I also think that this thesis is horribly flawed, and the reason is simple: I don’t think online poker is a market with healthy long-term growth prospects. The question that the author fails to address is: what will happen to the business when the most popular poker variants are solved by the computer? This is not a question of if, but a question of when and there is a reason that people don’t play chess or backgammon online for money.
Earlier this year scientist announced that they have solved heads-up limit hold ’em. The most played poker variants are a lot more complex than that game, but years ago it was reasonable popular. While it wasn’t officially solved until this year no-one was playing it for significant amounts of money anymore because you would risk getting your ass kicked by someone who would be getting strategy advice from the computer. While no-limit – the most popular poker variant – is a lot harder than limit the computer is learning fast. PokerSnowie is a commercially available program that is already pretty capable and better than most humans.
I think there is a reasonable high probability that within five or ten years computer-assisted players will be too good and too widespread and that as a result PokerStars’ main business will collapse. Because of that risk I think it is foolish to pay a high multiple for the company.
No position in Amaya