One Size Fits All

Say you're hunting for, I dunno, a pair of pants. You go into a shop and see a pair of jeans. Very stylish. They're torn, just so. They sport meticulously creased wrinkles, some tastefully worn lines. You check the price, $100.

You take a closer look. Some of the stitching is coming loose. The material seems shoddy. One of the legs is shorter than the other. You move on.

You find another pair. It has a similar worn-in vibe. When you take a closer look though, the material is much nicer. The stitching is solid. Even the legs are the same length! Check the price, $90.

Which would you rather have? Obviously I'm leading you here. You want the second pair.

Lamplighter recently came across two software companies. Both provide back-end solutions for casinos trying to operate online — accounts for players and the like. Both rode the frenzy of online gaming during the pandemic. Both are small — smaller now than they were during boom times. Both are trying to shift into providing content — the games digital punters play. Providing content is a more durable business — punters may send strongly worded emails if you tried to force a switch from, say, Treat yo' Elf, a Christmas-themed slot game to Book of Secrets, one with an Indiana Jones/Lara Croft aesthetic.

On the rack, they look similar, but those parallels don’t hold up.

Two Legs at a Time

The first of these companies, GAN, ran into some trouble. It borrowed a handful of debt to fund growth. It grew, so that worked. But it's struggled to make a profit from all that action. It's hard to pay back that debt if you're not making money.

With few options left, it put itself up for sale. It came to an agreement last November. A white knight, a Japanese company with no online gaming presence agreed to buy it for a massive premium and to provide funding for the time it takes to get through the regulatory knot.

This probably saved the business even if shareholders might not be too pleased they won't get anything close to the company's previous peak price.

Hem and Haw

The other company, Bragg Gaming, has had an equally choppy history. It's churned through a couple CEOs in the past few years. More recently, its largest customer was acquired by another company that does… exactly the same thing as Bragg. The back-office slice of that business looks likely to come up snake eyes (it will go away). Bragg will still probably keep providing games to that customer, though.

On that side of the business — the games — it’s found more success. It's growing quicker than GAN — about 30% per year for the past few years compared to 5%. It makes more money from that growth. It's turning about 13% of each dollar of revenue into cash for shareholders. GAN is burning through a similar portion of cash for each dollar of its revenue. Bragg owes just 3% of its value to lenders. A third of GAN's value is tied up in debt.

All this and somehow GAN is the happy seller.

Flying Off the Rack

And GAN isn’t the only one. Acquiring gaming software businesses has become something of a post-pandemic pastime. Of the eight software companies Bragg listed as competitors before the pandemic, six have folded into acquisitions.

That's part of the draw.

There's an active acquisition market for these types of gaming adventures, especially now that they sport such low values. As Bragg's cleaned up its stitching its also improved its appeal as an acquisition.

An acquisition is a likely outcome for Bragg, though not one Lamplighter counts on. What makes it work as an investment and more appealing than GAN, is that it works on its own. It's growing. Its transition to a more attractive business has been smoother. It earns <gasp> a profit. Its balance sheet is reasonably clean. Those things will help limit any potential downside.

At a price shy of all those other gaming companies, Bragg looks like its hanging on the discount rack all by itself. Whether it gets scooped up by its own white knight or earns enough cash to grow into a larger size share price is a thread worth pulling on.

Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.