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3 Gaming Stocks to Watch Despite Industry Challenges

The Zacks Gaming industry is gradually recovering from the coronavirus pandemic. Although the industry is benefiting from improving visitation in Las Vegas, dismal visitation in Macau is hurting it. 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 MGM Resorts International MGM, Wynn Resorts, Limited WYNN and Boyd Gaming Corporation BYD 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 Pre-Pandemic Level: Traffic persists as a major concern for the gaming industry since the coronavirus pandemic. However, the industry is gradually coming out of the woods despite a dismal performance in Macau still hurting the industry. Easing of local COVID-related restrictions helped gross gaming revenue (GGR) to rebound in August to $271 million compared with $49 million recorded in July. However, the figure was well below the August 2019 figure of $3 billion and also down 50.7% year over year. For the first eight months of 2022, Macau’s GGR declined 53.4% year over year and 85.4% compared with the same period in 2019. In 2021, Macau casinos’ performance was better than the 2020 reading but still well below the pre-pandemic level. In 2021, Macau’s gross gaming revenue (GGR) totaled $10.82 billion, up nearly 44% year over year. However, the 2021 annual figure was still 70% below the pre-pandemic tally. 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.

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 had struck in early 2020. Previously, in 2019, revenues from gambling hit a record high of $43.65 billion. In July 2022, U.S commercial gaming revenues came in at $5.06 billion, up 2.8% year over year. Gaming revenues surpassed the $5-billion mark four times in the last five months. Through July, commercial gaming revenues touched $34.27 billion, up 15.5% 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 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 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 #166, 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 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 Mar 31, 2022, the industry’s southbound estimate for the current year has widened 145%.

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 42.3% over this period compared with the S&P 500 Index’s decline of 11.7% and the sector’s decrease of 37.6%.

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 13.65. The space is trading at a discount compared to the market at large, as the forward 12-month EV/EBITDA ratio for the S&P 500 is 19.92.

Over the past five years, the industry has traded as high as 16.75X and as low as 6.89X, with a median of 10.91X, as the chart below shows.

Enterprise Value-to EBITDA Ratio (Past 5 Years)

3 Zacks Gaming Stocks to Watch for

MGM Resorts: Based in Las Vegas, NV, MGM Resorts is a holding company, and primarily owns and operates casino resorts through wholly-owned subsidiaries. MGM is benefiting from pent-up consumer demand, high domestic casino spending and robust demand for sports betting. Also, it is benefiting from increased visitation in the Las Vegas market. Sports betting and iGaming continues to be a major driver for MGM.

Shares of this presently Zacks Rank #3 (Hold) player have declined 17.7% in the past six months. Moreover, MGM’s 2022 earnings and sales are anticipated to increase 106% and 30% each, from the respective year-ago reported figures. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: MGM

Wynn Resorts: Based in Las Vegas, NV, Wynn Resorts and subsidiaries are a leading developer, owner and operator of casino resorts. WYNN is benefiting from improved non-gaming revenues and expansion in the domestic markets. Also, focus on WynnBET bodes well. Going forward, WYNN anticipates solid revenue generation on the back of new product features and a unique marketing campaign.

Shares of this currently Zacks #3 Ranked player have declined 15.2% in the past six months. Moreover, WYNN’s 2022 earnings and sales are anticipated to increase 39.5% and 2.1% year over year, respectively.

Price & Consensus: WYNN

Boyd Gaming: Founded in 1975 and headquartered in Las Vegas, NV, BYD is benefiting from initiatives to strengthen its current operations, and growth through capital investment and other strategic measures. The expansion of online betting offerings and the FanDuel partnership bodes well. Boyd Gaming is a multi-jurisdictional gaming company.

Shares of this presently Zacks Rank #3 player have declined 24.4% in the past six months. BYD’s 2022 earnings and sales are anticipated to increase 7.4% and 3.2% each from the respective year-ago reported numbers.

Price & Consensus: BYD

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