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The Zacks Gaming industry is gradually coming out of the woods, courtesy of improving visitation in Las Vegas. However, dismal performance in Macau continues to hurt the industry. The Macau recovery remains slow and it is still unclear when the market will return to its pre-pandemic level. However, robust demand for sports betting is aiding the industry. Stocks like Las Vegas Sands Corp. (LVS - Free Report) , International Game Technology PLC (IGT - Free Report) and Rush Street Interactive, Inc. (RSI - Free Report) are likely to gain traction from this upbeat demand.
Industry Description
The Zacks Gaming industry includes companies, which primarily own and operate integrated casinos, hotels and entertainment resorts. Some industry players also deliver technology products and services across lotteries, electronic gaming machines, sports betting and interactive gaming. Some industry participants further develop and operate gaming establishments as well as associated lodging, restaurant, horse racing and entertainment amenities. Some companies are also involved in developing and selling gaming applications. Additionally, e-sport or sporting event or tournament services, content management system, video software, mobile applications and e-sports data platform solutions are provided.
Key Themes Shaping the Gaming Industry
Visitation Still Below the Pre-Pandemic Level: Traffic has been a major concern for the gaming industry since the coronavirus pandemic. Dismal visitation has been hurting the industry’s gaming revenues in Macau. Gross gaming revenues (GGR) declined 56% year over year to 3 billion patacas ($374 million). For the first eleven months of 2022, Macau’s GGR declined 50.9% year over year. Notably, companies continue to focus on the level of services and staffing with selective amenities, and enhanced safety and social-distancing protocols in the gaming floor to welcome gamers. However, the easing of restrictions and investment will aid gaming revenues in Macau. In the next 10 years, six casino companies will invest nearly $15 billion.
U.S. Commercial Gaming Revenues Make Record: The gaming industry in the United States is recovering faster than anticipated. Per the American Gaming Association data, revenues from gambling hit a record high of $53 billion in 2021. Gambling was already flourishing in the United States until the pandemic struck in early 2020. Previously, in 2019, revenues from gambling hit a record high of $43.65 billion. In October 2022, U.S commercial gaming revenues came in at $5.29 billion, up 10.5% year over year. Through October, commercial gaming revenues touched $49.85 billion, up 14.7% year over year. The U.S. gaming industry will continue to improve.
Sports Betting a Major 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 for a while. Moreover, bettors can now place wagers via digital platforms in Connecticut, Kentucky, Michigan, Massachusetts, Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona, Montana, Colorado and other states. Some popular gaming applications include DraftKings, Barstool, FanDuel, BetMGM, BetRivers, Fox Bet and BetMonarch.
Zacks Industry Rank Indicates Cloudy Prospects
The Zacks Gaming industry is grouped within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #175, which places it in the bottom 29% of more than 248 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 outperforms 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 a 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 Sep 30, 2022, the industry’s estimate for current-year loss has widened 43.6%.
Despite the industry’s drab near-term prospects, we will present a few gaming stocks that one can add to the investment portfolio, given their strong fundamentals. But it’s worth looking at the industry’s shareholder returns and its current valuation first.
Industry Underperforms Sector 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 plunged 41.8% over this period compared with the S&P 500 Index’s decline of 20.3% and the sector’s decrease of 38.2%.
One-Year Price Performance
Gaming Industry's Valuation
Since gaming companies are debt-laden, valuing the same based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio makes sense. The industry currently has a forward 12-month EV/EBITDA ratio of 14. 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 10.31.
Over the past five years, the industry has traded as high as 21.97X and as low as 5.93X, with a median of 14.97X, as the chart below shows.
Enterprise Value-to EBITDA Ratio (Past 5 Years)
3 Zacks Gaming Stocks to Bet On
International Game Technology: Headquartered in London, International Game Technology provides gaming technology products and services globally. IGT is benefiting from continued player demand in the global lottery, robust digital and betting and strong global gaming revenues.
Shares of this currently Zacks Rank #1 (Strong Buy) player have declined 19% in the past year. Moreover, IGT’s 2022 earnings and sales are anticipated to increase 512.9% and 1.8% year over year, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: IGT
Las Vegas Sands: Based in Las Vegas, NV, Las Vegas Sands is a leading international developer of multi-use integrated resorts. The company is benefiting from a solid business model, extensive non-gaming revenue opportunities, high-quality assets and attractive property locations. The company is optimistic about Macau’s recovery on the back of resilient customer demand and spending.
Shares of this presently Zacks Rank #2 (Buy) player have increased 25.3% in the past year. Moreover, LVS’s 2023 earnings and sales are anticipated to increase 89.4% and 189.2% each, from the respective year-ago reported figures.
Price and Consensus: LVS
Rush Street Interactive: Headquartered in Chicago, Illinois, Rush Street Interactive operates as an online casino as well as a sports betting company in the United States and Latin America. The company is benefiting from robust volumes in markets where it operates both online casino and sports betting. The company is also witnessing strong results from both Colombia and Ontario.
Shares of this presently Zacks Rank #2 player have declined 81.1% in the past year. RSI’s 2023 earnings and sales are anticipated to increase 71.1% and 17.1% from the respective year-ago reported numbers.
Price and Consensus: RSI
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3 Gaming Stocks to Buy Despite Industry Headwinds
The Zacks Gaming industry is gradually coming out of the woods, courtesy of improving visitation in Las Vegas. However, dismal performance in Macau continues to hurt the industry. The Macau recovery remains slow and it is still unclear when the market will return to its pre-pandemic level. However, robust demand for sports betting is aiding the industry. Stocks like Las Vegas Sands Corp. (LVS - Free Report) , International Game Technology PLC (IGT - Free Report) and Rush Street Interactive, Inc. (RSI - Free Report) are likely to gain traction from this upbeat demand.
Industry Description
The Zacks Gaming industry includes companies, which primarily own and operate integrated casinos, hotels and entertainment resorts. Some industry players also deliver technology products and services across lotteries, electronic gaming machines, sports betting and interactive gaming. Some industry participants further develop and operate gaming establishments as well as associated lodging, restaurant, horse racing and entertainment amenities. Some companies are also involved in developing and selling gaming applications. Additionally, e-sport or sporting event or tournament services, content management system, video software, mobile applications and e-sports data platform solutions are provided.
Key Themes Shaping the Gaming Industry
Visitation Still Below the Pre-Pandemic Level: Traffic has been a major concern for the gaming industry since the coronavirus pandemic. Dismal visitation has been hurting the industry’s gaming revenues in Macau. Gross gaming revenues (GGR) declined 56% year over year to 3 billion patacas ($374 million). For the first eleven months of 2022, Macau’s GGR declined 50.9% year over year. Notably, companies continue to focus on the level of services and staffing with selective amenities, and enhanced safety and social-distancing protocols in the gaming floor to welcome gamers. However, the easing of restrictions and investment will aid gaming revenues in Macau. In the next 10 years, six casino companies will invest nearly $15 billion.
U.S. Commercial Gaming Revenues Make Record: The gaming industry in the United States is recovering faster than anticipated. Per the American Gaming Association data, revenues from gambling hit a record high of $53 billion in 2021. Gambling was already flourishing in the United States until the pandemic struck in early 2020. Previously, in 2019, revenues from gambling hit a record high of $43.65 billion. In October 2022, U.S commercial gaming revenues came in at $5.29 billion, up 10.5% year over year. Through October, commercial gaming revenues touched $49.85 billion, up 14.7% year over year. The U.S. gaming industry will continue to improve.
Sports Betting a Major 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 for a while. Moreover, bettors can now place wagers via digital platforms in Connecticut, Kentucky, Michigan, Massachusetts, Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona, Montana, Colorado and other states. Some popular gaming applications include DraftKings, Barstool, FanDuel, BetMGM, BetRivers, Fox Bet and BetMonarch.
Zacks Industry Rank Indicates Cloudy Prospects
The Zacks Gaming industry is grouped within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #175, which places it in the bottom 29% of more than 248 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 outperforms 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 a 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 Sep 30, 2022, the industry’s estimate for current-year loss has widened 43.6%.
Despite the industry’s drab near-term prospects, we will present a few gaming stocks that one can add to the investment portfolio, given their strong fundamentals. But it’s worth looking at the industry’s shareholder returns and its current valuation first.
Industry Underperforms Sector 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 plunged 41.8% over this period compared with the S&P 500 Index’s decline of 20.3% and the sector’s decrease of 38.2%.
One-Year Price Performance
Gaming Industry's Valuation
Since gaming companies are debt-laden, valuing the same based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio makes sense. The industry currently has a forward 12-month EV/EBITDA ratio of 14. 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 10.31.
Over the past five years, the industry has traded as high as 21.97X and as low as 5.93X, with a median of 14.97X, as the chart below shows.
Enterprise Value-to EBITDA Ratio (Past 5 Years)
3 Zacks Gaming Stocks to Bet On
International Game Technology: Headquartered in London, International Game Technology provides gaming technology products and services globally. IGT is benefiting from continued player demand in the global lottery, robust digital and betting and strong global gaming revenues.
Shares of this currently Zacks Rank #1 (Strong Buy) player have declined 19% in the past year. Moreover, IGT’s 2022 earnings and sales are anticipated to increase 512.9% and 1.8% year over year, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: IGT
Las Vegas Sands: Based in Las Vegas, NV, Las Vegas Sands is a leading international developer of multi-use integrated resorts. The company is benefiting from a solid business model, extensive non-gaming revenue opportunities, high-quality assets and attractive property locations. The company is optimistic about Macau’s recovery on the back of resilient customer demand and spending.
Shares of this presently Zacks Rank #2 (Buy) player have increased 25.3% in the past year. Moreover, LVS’s 2023 earnings and sales are anticipated to increase 89.4% and 189.2% each, from the respective year-ago reported figures.
Price and Consensus: LVS
Rush Street Interactive: Headquartered in Chicago, Illinois, Rush Street Interactive operates as an online casino as well as a sports betting company in the United States and Latin America. The company is benefiting from robust volumes in markets where it operates both online casino and sports betting. The company is also witnessing strong results from both Colombia and Ontario.
Shares of this presently Zacks Rank #2 player have declined 81.1% in the past year. RSI’s 2023 earnings and sales are anticipated to increase 71.1% and 17.1% from the respective year-ago reported numbers.
Price and Consensus: RSI