3 Gaming Stocks That Are Worth a Roll of the Dice

Friday, June 5, 2020 | Chris Markoch
3 Gaming Stocks That Are Worth a Roll of the Dice

When the nation’s economy shut down in March, the gaming industry was affected in specific ways. First, it was bad enough that many gaming companies had to shut all their casinos. There was really no option. A casino is not exactly a symbol of social distancing.

But the industry was also affected by the suspension of live sports. Many of these gaming companies have sportsbooks. And so not only could gamblers not go to casinos, there was nothing for them to bet on at the sportsbooks.

Online gambling and virtual reality gambling are a growing trend within the industry. In fact, virtual reality gambling is projected to grow at an annual rate of 21.5% until 2022. But for many of these gaming companies that’s like a restaurant offering curbside pickup and home delivery. It allows some revenue through the door, but it’s not sufficient.

According to the Business Research Company the global gambling market is scheduled to reach $565.4 billion through 2022. This assumes an annual growth rate of 5.9%.

But it appears that the worst may be behind the industry. Casinos are starting to re-open. In fact, some Las Vegas casinos are beginning to open on June 4. Capacity will be limited, but there will be revenue. And by the looks of it, there will be some appealing hotel rates for those that are willing to make the trip.

And, every day we’re getting more evidence that live sports will be returning. The National Basketball Association (NBA) will resume their season at the end of July. As of this writing, the situation regarding baseball is less clear, but it’s looking like there will be NFL Football in the fall. And even without fans, there will be opportunities for both the sports books and for fantasy sports.

Here are three stocks that are worth a roll of the dice in 2020.

Penn National Gaming (PENN)

In robust economic times, Penn National Gaming (NASDAQ:PENN) is rewarded for its asset-light business model. The company has $8.5 billion of lease liabilities. Of that number, approximately 10% ($900 million) will come due in 2020. The problem, of course, is that right now the tenants that have to pay the rent are not seeing traffic or revenue.

So it was no surprise that PENN stock lost nearly 90% of its value between February and March. And it’s also no surprise that the stock has recovered nearly all of its gains. So is this a case of too far, too fast? I don’t think so.

Although Penn needs the revenue it receives from casino operations, it also has a 36% stake in the digital sports media company, Barstool Sports. In fact, Penn is the exclusive gaming partner of Barstool for up to 40 years. This means Penn will be able to use the Barstool brand to help market its own online and retail sports betting and iCasino products.  And having live sports return will provide an additional catalyst to get revenue flowing.

Penn also benefits from geographical diversity. By having properties throughout the United States, the company was able to stagger its re-openings.  And if the worst-case scenario happens and there are select closings due to the virus, the company should be able to keep some properties open even if others have to close or remain closed.

MGM Resorts International (MGM)

If MGM Resorts International (NYSE:MGM) could do it all over again knowing what they do now, they would have pumped the brakes on opening their mobile betting app, BetMGM. This is MGM’s effort to become a significant player in the live sports betting market. And it’s a growing market.

According to Morgan Stanley (NSYE:MS) analyst Thomas Allen, the sports betting market is $150 billion. But keep in mind that sports betting is only legal in 16 states. There are 31 other states taking steps to legalize.

Before the shutdown, MGM was working to ensure BetMGM was seeded in every state where sports betting is legal. One of the ways they are accomplishing this is through their notable partnerships with Yahoo! Sports and Buffalo Wild Wings restaurants. In this regard, the lockdown may have given MGM an opportunity to hit the ground running.

The company began to open casino properties in Mississippi on Memorial Day. And other properties have come online in recent days. MGM has a solid balance sheet and was sitting on $3.9 billion. Now that revenue is starting up again, investors will start to return. And with a stock price that’s still about 60% below early February levels, MGM looks like a solid play for the rest of the year.

DraftKings (DKNG)

If there’s one gaming stock that needs live sports it’s a stock like DraftKings (NASDAQ:DKNG). DraftKings is the leader in Fantasy Sports with a 60% market share. But with all major college and professional sports postponed due to the novel coronavirus, DraftKings has been burning $15 to $20 million a month.

 So it stands to reason that DraftKings will be a major benefactor as live sports returns. In the first quarter, DraftKings revenue increased 30% to $89 million. Prior to the Covid-19 pandemic, DraftKings was showing a year-over-year gain of 60%.

Less than a year since its initial public offering (IPO), investors cheered this news. And even as the nation went into lockdown, investors did not punish DraftKings stock as much as other gaming stocks. Some of this was because consumers could still bet on esports. And in the last month, the stock has nearly doubled as investors are getting excited about a return to normal. Morgan Stanley’s Allen says that DraftKings will not be profitable until 2023. At that time, he projects the company will reach $1.4 billion in sales.



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