The iGaming and sports betting businesses are booming amid high inflation and thinning consumer wallets. Despite this, 2024 has not been a good year for the stock prices of these companies.
Shares of six U.S. gambling companies covered by Morningstar are down 3.9% this year on a market-cap-weighted basis, well below the 9.4% gain for the Morningstar Global Market Index.The declines are due to “concerns about competition and regulatory changes in the U.S. sports and iGaming markets, as well as slowing growth in U.S. brick-and-mortar casinos after a strong rebound in demand in 2021-23,” said Dan Wasiorek, senior equity analyst at Morningstar.
But he believes the company’s fundamentals are sound, but its shares have been underperforming and are trading at attractive prices. His two top picks are:
- MGM Resorts International MGM
- Caesars Entertainment CZR
He believes investors are placing “too much emphasis on competitive pressures” on these stocks.Wasiorek highlights four other betting and gaming stocks as attractive discount investments.
- Las Vegas Sands LVS
- Wynn Resorts WYNN
- DraftKings (DKNG)
- Pen Entertainment Pen
Outlook for Sports Betting and iGaming Stocks
Driven by new users, more consumers spending on these activities, and an increasing number of states allowing sports betting and iGaming, Wasiolek predicts solid revenue growth. He sees industry revenue growing 19% in 2024, 24% in 2025, 13% in 2026, and 27% in 2027. Over the past six quarters, U.S. commercial gaming revenue has grown an average of 9.3%, while U.S. GDP growth over the same period was just 2.1%.
“We believe this speaks to an enduring consumer demand for gambling activity, especially as the sports and iGaming betting landscape expands, becoming legal in more states and offering more in-game and casino play,” Wasiolek said.
Key to the outlook is the strength of visitor numbers to Las Vegas. “Las Vegas’ share of U.S. commercial gaming revenue has remained stable at around 20% over the past six quarters as the region sees more sporting and entertainment events attract visitors and bettors,” Wasiolek explained. “Meanwhile, sports and iGaming revenue shares have increased from the mid-teens and high single digits at the end of 2022 to the high teens and low double digits, respectively, in the first quarter of 2024, supported by further state and user adoption.”
Gambling growth is fueled by strong sales in states where the industry is legal and established, and consumers participating and generating demand. Sports betting is legal in 38 states and Washington, D.C., representing two-thirds of the U.S. adult population. Kentucky, Vermont and North Carolina introduced sports betting last year, and Rhode Island launched iGaming in March.
Seven more states are expected to allow sports betting by 2027, expanding coverage to about 90% of the adult population. Texas is one of the likely states, accounting for 8% to 9% of the U.S. adult population, which would boost industry revenue growth from $11 billion in 2023 to about $23 billion in 2027, Wasiorek said.
The same goes for iGaming. By 2025, the number of states that allow iGaming could grow from seven to 10-15. “The potential for increased tax revenue from this activity is what motivates it,” Wasiorek explains. Such expansion would see headline revenue estimates increase from $6 billion in 2023 to more than $12 billion in 2027.
Despite these predictions, U.S. gambling stocks, excluding DraftKings, have not performed well over the past year as “investors are concerned that rising financing costs will discourage investment in this capital-intensive industry,” Wasiorek said. Additionally, there are concerns about competition and regulatory changes in the U.S. sports betting market, as well as slowing revenue growth in Las Vegas.
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MGM Resorts International
“We think investors are focusing undue attention on the recent decline in revenue share from MGM’s digital division. Penn’s launch of ESPNBet in November 2023 and Fanatics’ acquisition of PointsBet in October 2023 have strengthened their positions in the U.S. sports betting market, but we expect share to stabilize in 2025 as MGM adds its profitable parlay betting product. The company also continues to launch new online casino games in 2024, which should support its competitive position in the digital business.”
Caesars Entertainment
“We believe rising market financing costs are causing concerns about Caesars’ high debt levels. We project the company’s debt-to-adjusted EBITDA ratio to be 6.1x in 2024. This creates an opportunity to own a company with a management team that has used cash flow proceeds from strategic alliances to quickly pay down debt rather than return money to shareholders through dividends or share repurchases, and has been a good steward of capital. We believe this is a prudent move. As a result, we view Caesars’ capital allocation as exemplary.”
Las Vegas Sands
“As China lifts its anti-COVID-19 restrictions in January 2023, we expect Las Vegas Sands’ Macau resorts (54% of 2023 EBITDA) to continue to generate significant revenue growth in 2024. We also believe that Las Vegas Sands and its Macau gaming region are well positioned for long-term growth. Not only does Sands have a leading mass and non-gaming position on Macau’s attractive Cotai Strip, but we also expect the company to reinvest in its assets in the region and strengthen its brand locally.”
Wynn Resorts
“Wynn’s Las Vegas revenue declined 54% in 2020, but sales in the region recovered to 92% of 2019 levels in 2021. Las Vegas revenue then increased 30% in 2022, reaching 131% of 2019 levels. In 2023, Las Vegas revenue increased 14% due to group and international travel and a strong fourth quarter events calendar. We see Las Vegas revenue growing approximately 3% annually on average from 2024 to 2033. We forecast that Las Vegas adjusted EBITDA margins will reach 37% in 2033 from 25.3% reported in 2019 due to improved cost efficiencies and revenue scale. Finally, we expect Wynn’s Boston Encore property to grow average annual revenue by 3% from 2024 to 2033.”
DraftKings
“We expect DraftKings’ share to grow and stabilize in the low to high 20% range in 2023 by leveraging its superior technology, product and data offerings. While PENN and FanDuel have dominated by share in Pennsylvania, we expect the recent decline in DraftKings’ share to be temporary given their strong user base and industry size. Additionally, DraftKings remains a leader in revenue in Michigan due to its superior technology and user data.”
Pen Entertainment
“We forecast Penn’s share of U.S. sports and iGaming will increase from 4% in 2023 to 6% by 2025 due to the launch of ESPNBet in November 2023, and remain within that range through 2027. Penn’s capital expenditures decreased from 10.9% last quarter to 2.6% in the first quarter due to the launch of ESPNBet. Sports and iGaming will represent 16% of revenue in 2024.”