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Tempted by the GVC share price? Here’s what you need to know

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Some see the stock market as gambling, and they know that’s for losers. It’s the bookies who win that game, like sports betting and gaming group GVC Holdings (LSE: GVC), not the punters. The GVC share price has stormed ahead since its big Covid-19 crash. It’s now down a relatively modest 11% in 2020, significantly better than the FTSE 100‘s 18% loss.

In reality, investing in shares for the long term is anything but gambling. It’s taking a stake in companies that generate real new wealth. So why not buy shares in GVC and pocket the real gamblers’ losses. It’s tempting, though I have my doubts. But first, I’ll turn to interim results released Thursday, which had very little effect on the GVC share price.

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The company reported an 11% drop in net gaming revenue for the six months to 30 June. Compared to the impact Covid-19 has had on spending in general, that looks more than satisfactory to me. And though gross profit fell 13%, GVC put its underlying EBITDA down just 5%. The pandemic seems to have produced a relatively soft impact for GVC’s business.

CEO Shay Segev said: “The strong performance of the online business coupled with the return of the sporting calendar and the re-opening of our retail operations means that the group is well placed for the balance of the year.

Positive outlook for 2020

The interim dividend was suspended in the light of the global crisis, but that doesn’t seem to have bothered investors too much. The board now expects to see underlying EBITDA of £720m–£740m for the full year, which would be a solid achievement. And while we don’t know if there’ll be a final dividend this year, analysts are forecasting cash as usual for 2021.

The GVC share price did crash heavily in the early lockdown days, losing almost 70% of its value at one point. Having recovered back to today’s levels, that would clearly have been a great time to get in. Even now, 2020 forecasts suggest a P/E of 14. And on the face of it, that seems good value for a recovering growth stock. So why do I get this twitchy feeling?

As my Motley Fool colleague Rachael FitzGerald-Finch has pointed out, GVC has reached its current size through acquisition. In recent years, it’s bought up Ladbrokes Coral and Digital Entertainment. And during that time, debt has reached £2,164.9m by 30 June. The company has been paying out dividends even during the past few years of pre-tax losses, while shouldering that debt. I don’t like that.

GVC share price booms and busts

The GVC share price has been very volatile over the past five years, peaking in 2018 at around 1.5 times its current level. To me, the chart shows all the signs of a classic boom-and-bust growth stock. To justify any significant share price gains over the next few years, I think we’d need to see significantly more earnings growth and a serious reduction in debt. And I’m not convinced that’s there.

I’d need to see the acquisition giant settle down to a few years of stability and organic growth before I’d consider investing. Until then, the GVC share price is too much of a gamble for me.

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Alan Oscroft 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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