So… what’s Porter Stansberry’s “picks and shovels” play in online gaming? It’s not a sports betting stock, which is somewhat of a relief given how aggressively those were touted a few years ago, but Porter hinted at his latest pick in the free lead-in part of his article on Friday, and I’ve got a very brief moment to write to you today because of some family commitments… so I thought we’d get a quickie out for you.

Here’s a taste of the lead-in from Porter, who uses these free intros as his teasers to recruit subscribers to The Big Secret on Wall Street ($1,000/yr)…

“As more Americans face greater uncertainty over their financial future, they’re increasingly turning to get-rich quick schemes in place of long-term investing. The average holding period for U.S. stocks has fallen from five years in the 1970s to less than 10 months today. Meme-stock speculation has replaced buy-and-hold investing. And America has turned into a nation of gamblers….

“As an investor, the secret to profiting from a booming new industry lies in finding the right business model. This often means avoiding the companies participating directly in the boom itself. Instead, the easier money is made by providing supplies and services to those companies chasing the frenzy. As legendary Fidelity Investments fund manager Peter Lynch once explained:

“During the Gold Rush, most would-be miners lost money… but people who sold them picks, shovels, tents, and blue jeans made a nice profit.”

“The same dynamic is at play in today’s online-gambling boom. The popular sports-betting apps and online-casino operators are capital-intensive businesses, with low or negative profit margins. So today, we’re taking a page from Lynch’s playbook to introduce a ‘picks and shovels’ equivalent in the gambling industry.

“This company is one of the most capital efficient businesses in any industry, with 40% returns on equity and profit margins approaching 60%. Since going public in 2015, this business has grown its revenues by an average of 50% per year.

“Despite the company’s incredible economics and growth trajectory, the stock trades near the lowest valuation level since going public eight years ago.”

And we’re told that Chris Mayer will be doing an interview with Porter this week, and that he has done a lot of research on this name… so it’s virtually certain that the stock they’re talking about is the swedish gambling technology giant Evolution (EVO.ST in Sweden, EVVTY or EVGGF OTC in the US), a company I looked at a few times back in 2020 and 2021 but was never convinced enough about to buy (a shame, because I bought at least one gambling stock which was much worse).

Evolution is a casino service company whose niche is live online gaming — with live hosts on video. So they have thousands of online dealers, in studios around the world, serving up games… but instead of each dealer handling one or two customers, they can handle dozens or more. They’ve done a lot of acquisitions and innovation to build new kinds of casino games that involve either their live studio hosts or are entirely online and virtual. Probably the bias that kept me from getting involved, years ago, was that I don’t like these games — I much prefer the live table in the casino with a dealer and a couple other players — but they have apparently done a great job of making Evolution’s online games very interactive and engaging and apparently gamblers (and casinos) love them.

And it’s pretty clear that Evolution has a brilliantly designed strategy and a well-run company. They charge a fee for each live “table” they offer to their casino partners, but they also take a commission on any winnings the casino has with that table, probably something in the neighborhood of 10% of the casino’s winnings. That gives them scalability and leverage, even though their biggest cost, 15,000+ employees who are mostly live studio hosts and dealers, does go up as the company grows.

They are really just beginning to make inroads in the US, which is probably their third or fourth largest market right now, but they’ve also localized their studios and hosts to provide local language and culturally appropriate hosts in Asia, Latin American and other parts of the world, so the ambition to grow is not slowing down. And though they’ve grown nicely, with free cash flow going from about $80 million to over $1 billion over the past five years, and continue to grow at a solid clip, the PE ratio is now back to where it was five years ago, in the low 20s.

I spent some time kicking myself for not buying Evolution back in 2020 and 2021, when it was soaring from $30 to $200… but perhaps it’s time to take it seriously again now that the valuation is back near it’s all-time lows, and the share price is down near $100 (those are all in US$, though most of the trading happens in Sweden — one Swedish Krona is worth about US$0.095, if you’re researching them on their home market… it’s lately trading around SEK 1,120 in Stockholm). I think I’ll put some more time into researching Evolution again, and maybe I’ll be able to get past my bias that I don’t personally like the “live online” studio-hosted gaming experience… clearly a lot of other folks love it, consider Evolution to have the best offerings, and are happy to throw money at this version of online gaming, and Evolution is raking in it’s share of that take. They’re also buying back shares, and there has been some insider buying at the company as well, so those are good signs.

You can check out their latest Investor Presentation for a little more detail on the numbers, and their website also has some good explanations of the strategy and business model.

No guarantees, of course, Evolution is in a highly regulated industry, and in dozens of countries, so there is always room for a shock or two (there was a short report alleging some regulatory risk back when the shares were near their all-time highs in late 2021), but I do like Chris Mayer’s stocks in general and own several other stocks that I know he owns and follows with his Woodlock House fund, and it’s interesting to see Evolution trading at what looks to me like a reasonable price again, only a small premium to the average stock, despite the likelihood that they’ll grow their earnings about 25% this year and at least 10% next year (they also pay a small but growing dividend, so the yield is a little over 2% at the moment). I’ll be spending some time digging into this story again, and will the Irregulars know if I decide to wade in.

I promised a quickie, so there you go — have a wonderful rest of your day, and do let us know if you’ve got an opinion to share on Evolution… or on any other favorites in the gambling space. Thanks for reading!