Social game developer
Zynga Inc. (
is gearing up to enter the U.S. gambling market. This Zacks #3
Rank (Hold) stock recently announced that it has filed an
application with the Nevada Gaming Control Board for an online
gambling license in the state. However, Zynga did not specify
what it intends to do with the license.
If Zynga is granted the license, it will be able to offer
online real money gambling games, similar to its upcoming
offering in the United Kingdom. In October this year, Zynga
entered into a partnership with Gibraltar-based online gambling
operator bwin.party to provide real money online poker and other
casino games (approximately 180) in the United Kingdom in the
first half of 2013.
Online gambling is illegal in the U.S. as per the regulations
of the Unlawful Internet Gambling Enforcement Act (UIGEA) 2006.
However, UIGEA, which was implemented in June 2010, does not
define illegal online gaming. The Act also does not apply to
online gaming conducted within the boundaries of a state or a
Similarly, the Interstate Wire Act of 1961 prohibits the
operation of certain types of betting businesses in the U.S.
However, in a December 2011 ruling, the Department of Justice
("DOJ") clarified that only sports-related betting falls under
the purview of this Act. The DOJ also said that Internet poker
does not violate the Wire Act.
The DOJ's ruling called for a federal framework to regulate
Internet poker and other forms of Internet gambling. This is
particularly important as state governments are looking for ways
to boost their crumbling budgets. Granting licenses for online
gambling was looked upon as an effective way to boost state
Nevada is one of the first states (Delaware being the other
one) to legalize online gambling. Besides Nevada and Delaware,
other states such as New Jersey are expected to legalize online
gambling in the near future. We believe that this provides a huge
growth opportunity to online game providers such as Zynga over
the long term.
According to data available from market research firm H2
Gambling Capital, as reported by Forbes, the global gambling
industry's total gross wins are expected to grow 5.6% to $417.0
billion of which 8.1% comes from online sources, which is
expected to increase approximately 10% by 2015. Of the global
gross wins, the U.S. generates approximately 25%, with only 3.3%
of the coming from online sources.
Lately, Zynga has been looking for new avenues to boost its
sagging revenues. The company recently lost its exclusivity to
), which is a huge setback. The company has been losing traffic
on a regular basis, which had a negative impact on its top-line
In such a scenario, we believe that Zynga's entry into the
online gambling industry will drive revenue growth, particularly
due to its innovative product portfolio that comprises online
poker and slot games. Moreover, this will help Zynga to reduce
its dependence on Facebook going forward.
According to Zynga, the whole process will take approximately
12-18 months to complete. We believe that Zynga will utilize this
time to build strategic partnerships with casino operators in the
state. The company has a sizeable cash balance ($1.3 billion at
the end of the third quarter) which will also help it to pursue
acquisitions in the sector.
We believe that partnerships and acquisitions will help it to
gain an immediate foothold in the online gambling market provided
it wins the license. Moreover, these partnerships and
acquisitions will help it to fight stiff competition from the
established casino operators going forward.
Nonetheless, we believe that the whole process is a time
consuming affair and the stock will likely be range bound until
the license is won. Year-to-date, the stock is down approximately
74% and we believe that Zynga's core business (social gaming)
needs to perform in order to gain investor confidence in the near
Thus, we remain Neutral on Zynga over the long term (6-12
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