Galaxy Gaming (OTC: GLXZ)

Pre-COVID, Galaxy's revenues were CAGR’ing at 14% since 2016, almost doubling from $12m in 2016 to $21m in 2019, with EBITDA margins in the mid 30’s. Additionally, Galaxy only recently started breaking out its revenue into iGaming and land-based, which we now know to be a rough 66%/34% split, respectively. Given the lack of disclosure pre-2021, we don't know much about the growth rate of each respective business line, but I expect that the iGaming business to significantly outpace the land-based business going forward. 

​

There is, of course, the obvious risk that a competitor may try to copy their games and undercut them, which would completely invalidate their business model. It’s reassuring to the investment thesis that Evolution has tried to do this in the past, but had to revert back to Galaxy’s games. The primary reason for this is due to the patent laws regarding games. If Evolution wants to use its version of 21+3 for example, it can't just change the name of the game, add it to its tables, and keep the same payout table. It has to change the payout of the game as well for the game to be legal. So if a three-of-a-kind in 21+3 pays 30 to 1, Evolution would have to change that as well. Galaxy takes such a small cut (3% to 5%) already of Evolution's side bet revenues, that it is not in Evolution's interest to try to undercut them. And if Evolution wanted to increase their house edge, players would just demand the Galaxy IP as they've done before.

From an anecdotal perspective, this makes sense if you understand that most gamblers are extremely superstitious. If a gambler is used to making a certain bet, they will likely be skeptical of placing more bets if the look, rules, and payouts of the game change drastically. Galaxy has therefore established a wide moat around its IP, seeing as it successfully defended itself against Evolution, the world's leading live casino operator.

​

Why does the opportunity exist?

​

1. Lawsuit

​

In 2019, the Board of Directors decided to redeem the shares of its founder, Robert Saucier, in exchange for a $39 million 10-year bullet note that accrues at 2%. The board decided to do so because Saucier’s involvement with the company had cost them the ability to secure gaming licenses in several states due to his run-ins with the law. As a result, Saucier sued the company, which has burdened Galaxy with mounting overhead and legal fees.

​

Galaxy, however, recently announced that it had reached a settlement with Saucier where the note would be settled at face value by the end of 2021, which significantly defogs Galaxy’s future. Given the company’s liquidity position, it will either have to raise debt or equity (hopefully mostly debt) to fund the note, but the company can now peacefully operate without having to deal with any lawsuits or major competitors. In the next section, I'll highlight how regardless of how the note is financed, the return for profile for Galaxy remains extremely attractive.

​

2. Illiquidity and lack of coverage

​

Galaxy is an incredibly illiquid and underfollowed company. The stock trades on the OTC exchange in the US and is really illiquid – only ~40k shares trade a day. Moreover, the company does no investor calls or presentations and has no analyst coverage. This makes the company un-investable for major institutions and is only suitable for investors’ personal portfolios.

​

Valuation

​

Galaxy’s cap table prior to the Saucier note stood as follows: