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3 Gaming Stocks to Watch Out For Despite Industry Woes

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The Zacks Gaming industry is gradually recovering from the coronavirus pandemic. Although the industry has been benefiting from improving visitation in Las Vegas, dismal visitation in Macau and Singapore has been hurting the industry. The Macau and Singapore recovery remains slow, and it is still unclear when the market will return to the pre-pandemic level. However, robust demand for sports betting is driving the industry. Stocks including Las Vegas Sands Corp. (LVS - Free Report) , MGM Resorts International (MGM - Free Report) and Accel Entertainment, Inc. (ACEL - Free Report) are likely to benefit from robust demand for sports betting. The gaming industry in the United States is recovering faster than anticipated.

Industry Description

The Zacks Gaming industry comprises companies that primarily own and operate the integrated casino, hotel, and entertainment resorts. Some of the industry players deliver technology products and services across lotteries, electronic gaming machines, sports betting and interactive gaming. Some industry participants also develop and operate gaming establishments, as well as associated lodging, restaurant, horse racing, and entertainment amenities. Some companies are involved in the development as well as the sale of gaming applications and provide e-sport or sporting event or tournament services; they offer content management systems, video software, mobile applications, and e-sports data platform solutions.

Key Themes Shaping the Gaming Industry

Visitation Still Blow the Pre-Pandemic Level: Traffic has been a major cause of concern for the gaming industry since the coronavirus pandemic. Although the industry has been gradually coming out of the woods, dismal performance in Macau and Singapore has been hurting the industry. In April, Macau’s gross gaming revenue (GGR) totaled $335 million — the lowest since September 2020. GGR in April was down sharply as well. In 2021, Macau casinos' performance was better in comparison to 2020 but still well below the pre-pandemic level. In 2021, Macau’s GGR totaled $10.82 billion, up nearly 44% year over year. However, the 2021 annual figure was still 70% below the pre-pandemic level. The companies have been focusing on levels of services and staffing with selective amenities and enhanced safety and social distancing protocols on the gaming floor to welcome gamers.

U.S. Commercial Gaming Revenues Hit Record Mark: The gaming industry in the United States is recovering faster than anticipated. According to data from the American Gaming Association, revenues from gambling hit a record high of $53 billion in 2021. Gambling was flourishing in the United States until the pandemic hit the industry. Prior to that, in 2019, revenues from gambling hit a record high of $43.65 billion. According to the report, 23 of the 34 operational commercial gaming jurisdictions in 2021 witnessed record revenues in 2021. The U.S. gaming industry will continue to improve.

Sports Betting a Major Growth Driver: The legalization of sports betting in Delaware, Mississippi, New Jersey, New Mexico, West Virginia, Pennsylvania, Rhode Island, Montana, Indiana, Tennessee, Illinois and New Hampshire has been driving growth. Bettors are now able to place wagers through the digital platforms in Connecticut, Kentucky, Michigan, Massachusetts, Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona, Montana, Colorado and other states. Some of the popular igaming applications include DraftKings, Barstool, FanDuel, BetMGM, BetRivers, Fox Bet and BetMonarch. Markedly, the applications have been an important medium for gamers to connect, learn and inspire amid the stay-at-home restrictions.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Gaming industry is grouped within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #221, which places it in the bottom 13% of more than 253 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Dec 31, 2021, the industry’s earnings estimate for the current year has nosedived 444%.

Despite the industry’s drab near-term prospects, we will present a few gaming stocks that one can hold in their portfolio, given their strong fundamentals. But it’s worth taking a look at the industry’s shareholder return and current valuation first.

Industry Underperforms and the S&P 500

The Zacks Gaming industry has lagged the S&P 500 Index and the broader Zacks Consumer Discretionary sector over the past year.

The industry has declined 52.9% over this period compared with the S&P 500 Index’s and the sector’s decline of 6% and 38.1%, respectively.

One-Year Price Performance

Gaming Industry's Valuation

Since gaming companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. The industry currently has a forward 12-month EV/EBITDA ratio of 16.5. The space is trading at a premium compared to the market at large, as the forward 12-month EV/EBITDA ratio for the S&P 500 is 11.75.

Over the past five years, the industry has traded as high as 24.79X and as low as 6.98X, with the median being at 16.35X, as the chart below shows.

Enterprise Value-to EBITDA Ratio (Past 5 Years)


3 Zacks Gaming Stocks Worth Retaining in the Portfolio

Las Vegas Sands: Based in Las Vegas, NV, Las Vegas Sands is a leading international developer of multi-use integrated resorts primarily operating in the United States and Asia. A solid business model, extensive non-gaming revenue opportunities, high-quality assets and attractive property locations bode well. The company is optimistic about Macau’s recovery as visitation continues to improve in the region.

Shares of this Zacks Rank #3 (Hold) company have declined 18.2% in the past six months. LVS’ 2022 earnings are anticipated to increase 45.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: LVS

MGM Resorts: Based in Las Vegas, NV, MGM Resorts is a holding company that primarily owns and operates casino resorts through wholly-owned subsidiaries. The company is benefiting from pent-up consumer demand, high domestic casino spending and robust demand for sports betting. It is also gaining from increased visitation in the Las Vegas market. Sports betting and iGaming continue to be major growth drivers.

Shares of this Zacks Rank #3 company have declined 25.7% in the past six months. MGM’s 2022 earnings are anticipated to increase a whopping 219.4%. In the past 30 days, earnings estimates for 2022 has been revised upward by 100%.

Price and Consensus: MGM

Accel Entertainment: Headquartered in Burr Ridge, IL, Accel Entertainment operates as a distributed gaming operator in the United States. The company provides licensed establishment partners with gaming solutions that appeal to players who patronize those businesses. The company is benefiting from an increase in video gaming terminals.

Shares of this Zacks Rank #3 company have declined 19.3% in the past six months. ACEL’s 2022 earnings are anticipated to improve 29.3%.

Price and Consensus: ACEL

In-Depth Zacks Research for the Tickers Above

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Las Vegas Sands Corp. (LVS) - free report >>

MGM Resorts International (MGM) - free report >>

Accel Entertainment, Inc. (ACEL) - free report >>