Is it time to bet big on these top growth stocks?

Thanks to a hyper-competitive market and the ongoing threat of government intervention, it’s not been an easy few years for listed gambling companies.

Looking ahead, I wouldn’t be surprised if the recent spate of consolidation seen in the industry continues with one stock in particular likely to feature.

Prime target

Gaming provider 888 Holdings (LSE: 888) could be attractive to many other companies in the industry thanks to its digital technology. It’s certainly been open to discussing deals in the past, having almost merged with casino and bingo hall operator Rank back in 2016 with the intention of buying bookmaker William Hill — a hugely complex deal that ultimately collapsed. 

Clearly, any potential suitors of 888 would be getting a good business with decent growth prospects. December’s trading update revealed that adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) for the full year would be in line with market expectations. The mid-cap saw “further progress in Casino, strong momentum with 888Sport, increased activity on mobile devices and continued expansion in regulated Continental European markets“. 

These results were particularly impressive given the decision to back out of five markets over the first half of the year and the increased attention from regulators, particularly in the UK. As far as the latter is concerned, CEO Itai Frieberger remarked on his confidence that 888 was “well positioned” as this focus continues to tighten.

Shares in 888 have climbed a very respectable 29% over the last year. Based on analyst expectations for 2018, the stock currently changes hands for a little under 20 times earnings. That’s not exactly cheap — and certainly a lot higher than the valuations afforded to traditional high street bookmakers — but the company’s technological know-how and sizeable net cash position perhaps justify this premium. A forecast dividend yield of 4.1% should also appeal to income hunters. 

Buying shares in a company based purely on the possibility of a takeover or merger is a risky move. Given that the underlying business appears sound, however, I wouldn’t blame investors for becoming increasingly interested in 888.

Ready to recover?

While perhaps an unlikely takeover target, I also think online gaming software provider Playtech (LSE: PTEC) warrants closer inspection given the rather attractive valuation attached to its shares.

Right now, you can pick up stock in the FTSE 250 constituent for just under 12 times expected earnings for the new financial year. Why this cheap? Let’s turn back the clock.

Back in November, the stock lost over 20% of its value after issuing a profit warning. Despite an acceleration of daily average revenues in its Gaming division since August, the company stated that a slowdown in some Asian markets coupled with difficulties relating to its Sun Bingo contract would mean that full-year profits would now be “around 5% below the bottom end of market expectations“.

While it was inevitable that this news would disappoint some investors, I think the reaction was overdone. Other parts of the business appear to be doing well, with Playtech’s Financials division showing signs of continued growth. Moreover, the company’s declaration that it would continue to “increase its exposure to key regulated markets” — thus reducing the relative contribution from Asia — looks entirely appropriate.

Playtech next reports to the market on 22 February. Should the numbers be reassuring, I can see the stock recovering to former highs fairly quickly.

Another great opportunity

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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