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Are these FTSE 250 stocks heavily undervalued?

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It’s been a bumpy ride for the UK gambling industry in recent times. First, we had the ongoing fixed-odds betting terminal (FOBT) saga, which – after much deliberation – saw the UK government reduce the maximum stake size from £100 down to a mere £2.

With major high street bookmaker William Hill (LSE:WMH) reporting a loss of £722 million last year, the FOBT reduction has been highly detrimental for betting shops.

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Outside of the adverse FOBT outcome, it was also announced in late 2018 that the UK Treasury would be hiking the tax rate on revenues deriving from the online sector. Rising from 15% to 21%, the tax hike will come into force in October.

At the time of writing, William Hill shares are priced at 299p, representing a mouthwatering 12-month decline of 46%. Fellow counterpart GVC Holdings (LSE:GVC) – which is behind rival bookmaker Ladbrokes, as well as a number of online casino brands – has seen its share price drop by 42% during the same period.

So, with that being said, why on earth do I think that these FTSE 250 stocks are heavily undervalued?

The remote gambling market is booming

It is important to note that both William Hill and GVC Holdings have an ever-growing presence in gambling markets outside of their core UK high street portfolio of shops. This includes the remote gaming market, which covers bets placed online or via a mobile device.

With the online segment of the industry accustomed to £5 billion worth of bets in the UK alone last year, this is a marketplace that operators will look to focus on in the coming years. Furthermore, the remote space is expected to grow by an additional 40% by 2022, so an estimated £49 billion industry lies in waiting.

As the remote sector demands significantly lower overheads in comparison to bulky high street betting shops, this will allow both William Hill and GVC Holdings to utilise their resources in higher-growth markets.

Significant opportunities for international expansion

As both William Hill and GVC Holdings already possess a solid online framework that currently spans continental Europe and Australia, they are in prime position to target new foreign markets with ease. For example, with policymakers in India and Russia currently building an online gambling regulatory framework of their own, these should prove to be key marketplaces for UK gambling companies.

However, an even more lucrative marketplace is slowly but surely opening its doors to the online betting space – the US. Apart from four states, sports betting in the US has been prohibited since the mid-1990s. That was until last year, where the Supreme Court ruled that the ban was unconstitutional.

When one considers than the US sports betting black market is estimated to be worth $150 billion annually, this could soon be one of the largest regulated gambling markets in the world.

While both companies already have a presence in the US, it is William Hill in particular that has acquired a noteworthy market share. For example, the company currently operates more than half of all sports betting outlets in Nevada.

Ultimately, while I appreciate that the future success of both William Hill and GVC Holdings will primarily be based on transnational expansion and a diversification of gambling markets, at current prices I would argue that the stocks offer tremendous value.

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Kane Pepi does not own shares in any company mentioned in this article. The Motley Fool UK has recommended GVC Holdings. 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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