I have an interest in gambling and poker as a venue for some modest entertainment. After all, investing in penny stocks would qualify as gambling, but like any gambler, we look for an edge or advantage. With penny stocks, my edge is many years of experience and a long list of trusted associates in microcap stock market circles.
The global gambling industry has been growing steadily and strongly at about 8–9% per year. That is about three times economic growth and strong growth is forecast until at least 2022. There are a few reasons:
- The gambling industry is expanding all around the globe due to the government efforts to increase tax earnings and attract tourists. Many countries have recently legalized or are considering legalizing the gambling industry due to the economic benefits for the country.
- Increasing smartphone and tablet penetration, increased device capability and the confidence of users are driving the market growth as well.
- The appeal for entertainment provided by casinos and the gaming industry has heightened, as increasing number of American citizens tend to purchase lottery tickets on a regular basis.
During the past few decades gambling has been legalized in a number of states, which led to considerable growth in the number of casinos and other establishments offering gaming opportunities.
In 1990 there were only three states in the U.S. with casinos, in 2016 there are 41 States.
Publicly held casinos and gaming industry companies manage gambling facilities and platforms, such as land-based casinos, riverboat casinos and gambling websites. According to the mapping of the Sustainable Industry Classification System (SICSTM–website) to the Bloomberg Industry Classification System (BICS), casinos and the gaming industry in the U.S. are dominated by huge players such as Las Vegas Sands (LVS), MGM Resorts (MGM), Caesars Entertainment (CZR), Wynn Resorts (WYNN) and Melco Crown Entertainment [ADR] (MPEL).
There is a new evolution or new notable trends in gambling.
- According to Robert Williams of the International Think Tank on the Gaming Industry, Electronic Gaming Machines (EGMs) are the most profitable type of gambling in the Western world for the gambling provider.
- Asia is becoming the dominant gambling mecca and will soon overtake the U.S.
- Online gambling and mobile gambling are growing at a much stronger rate than the industry. In fact, this is probably driving the growth in the physical gambling facilities.
Just look at the World Series of Poker for proof. In 2001, before the online poker boom, there were 612 entrants in the Main Event of the World Series of Poker. In 2012? A total of 6,598 players took a seat in the Main Event. According to World Series of Poker, 2017 came in with the third highest number ever at 7,221.
The evolution of gambling is bringing up the un-imagined revenue to the imagination in the world. I have seen this description while researching the industry and it sums up the company Jackpot Digital to a tee.
Jackpot Digital (JP:TSX.V; JPOTF:OTC; LVH1:FSE)
Recent Price C$0.05
Shares outstanding: 370M approximate
Remember the "Poker Boom" between 2003 and 2006. During that period, primarily no limit Texas hold 'em, but also other variations, became considerably more popular around the world. During the boom years the online poker player pool at least doubled in size every year.
Now there is a second poker boom underway,specifically with Texas hold 'em called the "bad beat." The bad beat has been around for a while and it is basically a progressive pot that keeps growing until a bad beat is triggered. In the last few months there have been record setting bad beats triggered in Canada and the U.S.
What all this means: Jackpot Digital has the exact right product at the best possible time.
I believe the real Jackpot in Jackpot Digital will be the shareholders.
Jackpot Digital has been in the electronic gaming machine market for many years and has a lot of experience, good contacts in the industry and growing revenues. Revenues for the first nine months of 2017 were reported at $2.9 million from its industry-leading PokerPro ETG system, currently in operation with cruise lines, poker rooms and casinos.
However, what is exciting and an enormous leap from the PokerPro system is its new Jackpot Blitz™ electronic table. This is a large electronic Texas hold 'em table and much more. It is built on state of the art technology, with an 84-inch 4K ultra sensitive touchscreen capable of handling multiple touch points simultaneously.
I cannot give this enough justice with pictures and words. This youtube video that shows it in operation is a must view.
This youtube video will actually show you a game in progress with sound effects and how players operate their electronic hand.
Casinos adore Jackpot Blitz
While this will disrupt the gambling industry, it is being embraced by both players and gaming companies because it:
- Reduces expenses of staff and maintenance
- Eliminates downtime by offering multiple games simultaneously
- Increases profit with faster. Error free game play
- Responsive hand gestures
- Players will be able to order drinks and snacks right on table menu display.
- Multiple player payment options (cash, ticket-in/ticket-out, and room cards)
- Automated mobile reports eliminate manual tracking
Have a look at some of the recent agreements that Jackpot Digital has signed with casino groups:
Sept 20, 2017, JP signed licensing agreement with a distributor to lease its products in Asia.
October 19, 2017, JPsigned a letter of intent with a Latin American casino group formalizing the first order for the company's Jackpot Blitz.
October 23, 2017, JP signed a letter of intent with Grey Rock Casino in Edmundston, N.B., formalizing an order for the company's Jackpot Blitz.
November 10, 2017, JP signed a significant software license and equipment lease agreement with a gaming operator to deploy the company's next-generation Jackpot Blitz ETGs in its casinos.
I would bet this is a major casino that does not want its name out there so it can get a jump on its competitors.
January 15, 2018, JP signed a software license and equipment lease agreement with the Taormina Hotel & Casino in San Jose, Costa Rica, formalizing an order for the company's Jackpot Blitz.
You get the picture here, this will be no problem selling, it is only a matter of how many, how soon. The revenue model is very lucrative as it is perpetual reoccurring revenue. Normally the company will lease or license these tables.
Summary
As investors you have a rare opportunity. If you noticed, well at least before I sent this report out, these youtube videos have only seen 100 or 200 views. The investment world has no clue about this yet. I don't think that will last very long.
The North American casino industry is predominantly regulated at the state/provincial level as individual jurisdictions. Additionally, some states have Native American tribal jurisdictions. Every jurisdiction approves the gaming equipment used in its casinos, usually in the form of a gaming license. Therefore, JP must attain gaming licenses directly or through a distributor to expand its ETG business in North America. Jackpot Digital currently has licenses in select Canadian provinces and four U.S. states.
The cruise ship industry operates their casinos while they are in international waters, and therefore, they do not require their gaming equipment vendors to attain any form of gaming license. JP is currently leasing ETGs on a monthly recurring basis to cruise ship companies. Their largest customer is Carnival Corporation, which is the largest cruise operator in the world.
By the numbers
The company is working on many Jackpot Blitz™ tables and this is just the tip of an iceberg. The numbers could be staggering and speaking of icebergs, let's have a peak at the cruise line industry as it will be easy and quick to implement as no licenses are required.
Carnival is the cruise leader and operates 103 cruise liners worldwide, according to Cruise MarketWatch.
Royal Caribbean is next with 42 and then Norwegian with 26. All told there are 314 cruise liners and I expect Jackpot Blitz™ will catch on with all of them. JP already has their older tables in Carnival ships and in August 2017, the company carried out the 10th Annual Carnival PokerPro Challenge on a Carnival Cruise ship. The poker tournament was played using the company’s PokerPro ETGs; that included 548 poker players.
I expect Carnival will install the new tables. Royal Caribbean and Norwegian will likely follow just to be competitive and if we ignore all the others, that would be around 170 cruise ships, just over half the market. If we assume two tables per ship, I believe a conservative number of tables would be 340.
In 2016, there were 2,169 casinos and 1,517 poker rooms in Canada and the United States. To be conservative, if Jackpot capitalized on about one-quarter of that business with one table per casino, then those are significant numbers, more than 1,000 tables in land-based casinos.
The new Jackpot Blitz™ tables will bring in more revenue than JP's earlier model so I figure around US$50,000 annual revenue per table would be a good average. Assuming market penetration in cruise ships and U.S. and Canada land-based casinos, and ignoring JP's penetration that has already started outside of North America, a conservative estimate would be 1,340 tables in the next two years. That equates to US$67 million in annual revenue.
Jackpot continues to maintain its wireless gaming software which consists of Texas Hold ’em and tournaments, various casino table games and 16 slot games, that can be played on smartphones, tablets and personal computers through any modern web browser.
Carnival Corporation is the largest operator of the company’s wireless gaming software. As of the date of this MD&A, the wireless gaming software is available on a number of Carnival’s cruise ships. As part of the agreement, Jackpot will share revenues earned from the software.
On February 27, Jackpot Digital announced that it signed a new agreement with Carnival Corporation. In phases Jackpot Digital will replace all the existing PokerPro Electronic tables with Jackpot Blitz™ tables. Jackpot has already replaced seven PokerPro tables on Carnival ships with Jackpot Blitz™ units to date, and thus far all seven Jackpot Blitz™ tables have gained positive feedback from their guests.
The current revenue run rate is about $4M and with new Jackpot Blitz™, I am expecting a run rate over US$60 million ($75M Cdn) within two years. JP's current market cap is about $18.5 million. If we assume another 230 million shares in dilution with warrants and future financing, that would be around 600 million shares out. Tech start-up companies can be valued between 3 and 10 times revenue, depending on their growth rate.
3 X C$75M = $225M valuation /600M shares = $0.375 per share.
6 X $75 M and we are looking at $0.75 per share.
A real game changer—pardon the pun—will be the classification of Jackpot Blitz™ in various jurisdictions. If it is categorized as a video gaming terminal, regulations will be far more lax than if it is considered a gambling table. Video gaming terminal could mean Jackpot Blitz™ tables in local bars, clubs and other such venues.
I believe I used a conservative number with 1,340 tables, so this could be much higher, but would take three to four years to deploy these higher numbers.
I would bet the most likely scenario is Jackpot Digital is bought out by one the major gaming companies I mentioned at the beginning of this article. One of these companies could ante up a significant amount to buy out Jackpot and that would be chump change for them.
And to put icing on the cake, there is another factor that could add significant value to the share price.
Gambling companies are leading the way in the initial coin offering market, according to Credit Suisse research. The report found gaming and gambling companies stand to benefit most from the blockchain and cryptocurrency space.
On January 4, 2018 Jackpot Digital entered into a binding LOI to acquire International Interactive Ventures of Israel, which includes the assets of existing cryptocurrency mining, blockchain technology and associated software. The assets include existing cryptocurrency mining operations located in a former NATO storage facility in Budapest, Hungary, which have grown over the last year to over 180 cryptocurrency mining rigs. Jackpot could use this as a finance tool to avoid share dilution, create a cryptocurrency for electronic gambling and has indicated it may spin the asset out at some point and distribute shares to Jackpot shareholders. I am looking forward to further developments on this front.
On the chart, the stock has been in a trading range between 4 and 6 cents, building a new higher base. I believe it will soon break out of this base as the new Jackpot Blitz™ system becomes known to investors. If it does not happen through investor channels, it will occur through gaming channels as I expect the company will gain huge media exposure as this product rolls out. Right now you can buy near the bottom of the trading range. A close above 7 cents would signal a break out and I would consider adding to positions when that occurs.
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Ron Struthers founded Struthers' Resource Stock Report 23 years ago. The report covers senior and junior companies with ample trading liquidity. He started his Millennium Index of dividend stocks in 2003 - $1,000 invested then was worth over $4,000 end of 2014 and the index returned 26.8% in 2016. He retired from IBM after 30 years in customer service, systems and business analyst, also developing his own charting software. He has expertise in junior start-ups and was a co-founder of Paramount Gold and Silver.
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Disclosure:
1) Ron Struthers: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Jackpot Digital. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company currently has a financial relationship with the following companies mentioned in this article: Jackpot Digital advertises on Playstocks.net. I determined which companies would be included in this article based on my research and understanding of the sector.
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Charts and images provided by the author.
Ron Struthers Disclsoures
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