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Gaming Industry Near-term Outlook Bleak on Coronavirus Woes

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The Zacks Gaming industry comprises companies that primarily own and operate integrated casino, hotel, and entertainment resorts. Some of the industry participants also deliver technology products and services across lotteries, electronic gaming machines, sports betting and interactive gaming.

Major companies in the gaming industry include Wynn Resorts, Limited (WYNN - Free Report) , Las Vegas Sands Corp. (LVS - Free Report) , MGM Resorts International (MGM - Free Report) and International Game Technology PLC (IGT - Free Report) .

Let’s take a look at the industry’s three major themes:

 

  • The coronavirus pandemic has hit gambling hubs — Macau and Las Vegas — hard. Although most of the casinos in Macau have resumed operations after coronavirus-induced shutdown, casino tables are still empty. This has resulted in sharp decline in gross gaming revenue (GGR) in March. Gaming revenues from the world’s largest gambling hub fell for the sixth consecutive month. Moreover, in the first three months of 2020, gross gaming revenues declined 60% year over year to $30.48 billion patacas ($3.8 billion). The decline can be primarily attributed to a reduction in footfall as China continued to decline individual and group visas to Macau as a safety precaution. Macau is likely to witness revenue decline in the rest of the year as well. The government has reduced 2020 Macau gross gaming forecast by half. It now anticipates gross gaming revenues to be 130 billion patacas ($16 billion) compared with the prior estimate of 260 billion patacas.
     
  • Gambling industry is also suffering in Las Vegas, which is one of the hottest spots for gamblers, due to the coronavirus outbreak. Casinos in Las Vegas have been closed to contain the spread of virus. Countries like Australia, South Korea, the Philippines and Cambodia have also closed casinos on account of the same.
     
  • Legalization of sports betting outside Nevada has given the industry a new lease of life. The Supreme Court overturned the Professional and Amateur Sports Protection Act (PASPA) that banned sports betting outside Nevada. The scope for casino operators will grow as illegally, the activity is valued at billions of dollars annually in the United States. Sports betting has been legalized in Delaware, Mississippi, New Jersey, New Mexico, West Virginia, Pennsylvania, Rhode Island, Montana, Indiana, Tennessee, Illinois and New Hampshire. Moreover, Connecticut, Kentucky, Michigan, Massachusetts, Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona and other states are likely to follow suit in the coming months.

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 #131, which places it in the bottom 48% of more than 250 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 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, 2019, the industry’s earnings estimate for the current year has gone down 73.7%.

Before we present a few stocks from the industry that you may want to consider despite the near-term blip, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags Sector and S&P 500

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

The industry has fallen 38.6% over this period compared with the S&P 500 Index’s and the broader sector’s decline of 5.4% and19.9%, 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 trailing 12-month EV/EBITDA ratio of 9.21 versus the high of 13.24 in the past year and the median level of 11.91. Additionally, the industry is trading at a discount when compared to the market at large, as the trailing 12-month EV/EBITDA for the S&P 500 composite is 10.07X.

Over the past five years, the industry has traded as high as 24.45X and as low as 7.72X, with median being at 13.03X, as the chart below shows.

                          Enterprise Value-to EBITDA Ratio (Past 5 Years)

 

Bottom Line

The coronavirus pandemic is hurting the gaming industry as most of the casinos are either closed or witnessing lower traffic due to the outbreak. However, continued innovation, increasing use of smartphones and other electronic devices, and rise in online gambling bode well for the industry.

Here we present a couple of stocks with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

These stocks are well positioned to grow in the near term.

Zynga Inc. (ZNGA - Free Report) : The company develops, markets and operates social games as live services in the United States and internationally. The consensus mark for the company’s current-year earnings has been revised upward by 9.5% in the past 30 days. The company has an impressive long-term earnings growth rate of 16.3%.

                                Price and Consensus: ZNGA

 

Super League Gaming, Inc. (SLGG - Free Report) :  Super League Gaming is an amateur esports community and content platform. The company’s expected earnings growth rate for the current year is 14.1%.

                                 Price and Consensus: SLGG

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