Yahoo Finance 3 Gaming Stocks to Buy Despite Industry Challenges
The Zacks Gaming industry is likely to be hurt by high inflation and interest rate concerns. However, favorable developments in Macau's gaming revenues are playing a significant role in driving the sector forward. Also, strong demand for sports betting is contributing to the industry's trends. Stocks like Churchill Downs Incorporated CHDN, Light & Wonder, Inc. LNW and Accel Entertainment, Inc. ACEL will likely gain traction from this upbeat demand.
Industry Description
The Zacks Gaming industry includes companies that 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 firms develop and operate gaming establishments and associated lodging, restaurants, horse racing and entertainment amenities. Many companies are involved in developing and selling gaming applications. E-sports or sporting events or tournament services, content management systems, video software, mobile applications and e-sports data platform solutions are provided as well.
Key Themes Shaping the Gaming Industry
High Inflation Hurts: The prolonged inflation, culminating in the highest U.S. interest rates seen in 20 years, is starting to impact the casino gaming sector. This is evident in reduced consumer spending and increased operational costs for operators. This is a particular concern as many are considering substantial investments to upgrade their facilities. On Apr 28, the Commerce Department reported that the personal consumption expenditure (PCE) price index, a key inflation gauge of the Federal Reserve, increased 2.7% in March on a year-over-year basis, surpassing the consensus estimate of a rise of 2.6%.
Macau Gaming Revenues Improving: The industry benefits from improving visitation. In April, Macau’s gross gaming revenues (GGR) rallied 26% year over year. Revenues reached approximately 79% of the pre-pandemic level recorded in 2019. Robust investment will continue to aid the gaming industry in Macau. Casino operators are adopting a disciplined operational strategy by streamlining business processes, enhancing marketing approaches and renegotiating contracts with vendors and third parties. There is an intense emphasis on improving service quality and staffing levels to cater to gamers better.
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. Bettors can 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 Dismal Prospects
The Zacks Gaming industry is grouped within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #165, which places it in the bottom 34% of more than 251 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull 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 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 Jan 31, 2024, the industry’s southbound estimate for the current year increased 8.5%.
Despite the industry’s drab near-term prospects, we will present a few gaming stocks that you can add to your investment portfolio, given their strong fundamentals. But it’s worth looking at the industry’s shareholder returns and its current valuation first.
Industry Underperforms the S&P 500
The Zacks Gaming industry has lagged the S&P 500 Index and the broader Zacks Consumer Discretionary sector in the past year.
The industry has declined 5.7% over this period against the S&P 500 Index’s increase of 24%. In the same time frame, the sector has gained 1.2%.
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 10.8. The space is trading at a discount compared with the market at large, as the forward 12-month EV/EBITDA ratio for the S&P 500 is 12.57.
In the past five years, the industry has traded as high as 22.43X and as low as 6.14X, with a median of 14.17X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past 5 Years)
3 Gaming Stocks to Watch for
Light & Wonder: Headquartered in Las Vegas, NV, the company is benefiting from robust SciPlay and iGaming revenues. In 2023, Light & Wonder experienced a remarkable year. The company's various businesses achieved double-digit growth consistently throughout the year, fueled by strategic investments and effective execution.
This Zacks Rank #1 (Strong Buy) company’s shares have surged 51.4% in the past year. Earnings estimates for 2024 have increased 4.7% to $3.78 in the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: LNW
Churchill Downs: Headquartered in Louisville, KY, the company operates as a racing, online wagering and gaming entertainment company in the United States. The company is benefiting from robust sports and casino net revenues as well as expansion efforts.
This Zacks Rank #2 (Buy) player’s shares have increased 9.4% in the past six months. Moreover, earnings estimates for 2024 have increased 2.3% to $5.72 in the past 30 days.
Price and Consensus: CHDN
Accel Entertainment: Headquartered in Burr Ridge, IL, the company is benefiting from an increase in locations and gaming terminals.
Shares of this Zacks Rank #2 player have increased 27.3% in the past year. Moreover, ACEL’s 2024 sales are anticipated to increase by 2.6% from the year-ago reported figures. In the past seven days, earnings estimates for 2024 have witnessed upward revisions of 2.4%.
Price and Consensus: ACEL
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Churchill Downs, Incorporated (CHDN) : Free Stock Analysis Report
Accel Entertainment, Inc. (ACEL) : Free Stock Analysis Report
Light & Wonder, Inc. (LNW) : Free Stock Analysis Report
