While many investors are worrying about whether the Fed will create the next Great Inflation, those who bought into the hype around sports betting and iGaming might be more worried about the current Great Deflation.
Stocks of all types—operators, pure plays, brick-and-mortar/digital hybrids, technology providers, affiliates—have been slammed.
Here’s the recent damage on the stock prices of select former sports-digital high-fliers. From their highs as of this writing:
Pure Plays
Score Media and Gaming – 69%
Golden Nugget Online – 55
Rush Street Interactive – 54
GAN – 53
DraftKings – 43
PointsBet – 36
Kambi – 27
Brick-and-Mortar/Digital Hybrids
Penn National – 45%
Churchill Downs – 27
MGM – 9
Caesars – 8
Affiliates
Better Collective – 22%
Catena – 8
There are several reasons for the sell-offs.
One is that digital gaming stocks have gotten caught up in the general tech sell-off in the broader market.
Another is that sobriety has settled in on investors who were drunk with the promise of revenues going to the moon, and not asking about when the profits would come.
Some have come about because of the dawning realization that not every company can meet its targeted 10 percent or 20 percent market share without either suspending the law of mathematics or some number of them failing to make it.
Some have come in the realization that a brick-and-mortar casino company whose main business is valued at eight or nine times EBITDA can’t sell for several times that valuation simply because it has a rah-rah online gaming operation.
And some have come about because even companies that say they’re focused on profits are, in fact, losing money chasing market share.
Some might look at these declines as buying opportunities. Others might suggest that stocks selling at eight or 15 or 20 times future revenues with negative EBITDA expected for several years are still not bargains and can fall farther, perhaps much farther.
Here are some of our observations:
- Land-based casinos will rule. Whether its Caesars or MGM or Wynn, the companies with huge player databases, huge financial resources and destination resorts to cross market will ultimately be big winners. And, because they do not have to rely on digital, they can avoid ruinous marketing.
Among these is Penn National, but investors should ask themselves whether the stock price still is attributing too much value to digital and perhaps it may go lower to reach equilibrium.
- Among pure play operators, DraftKings may be the one company that can go toe-to-toe long-term with the big boys, but even it will have to show a road to profitability, and not just to revenue.
FanDuel could be another successful pure play, but it’s not publicly listed yet.
- Special situations exist. Golden Nugget Online and Rush Street Interactive are focused on online casino, which gets fewer headlines but has higher profitability than sports betting. Both companies are making progress in their pursuit of iGaming customers, but both also have a long period of losing money ahead as they pursue market share.
Score Media and Gaming is more a bet than an investment at this point. If Canada legalizes sports betting, Score will score in its homeland. If not, it may struggle to reach enough business volume in the U.S. to compete against bigger companies.
- Selling picks and shovels to miners still works. As such, affiliates like Catena Media, data providers like Genius Sports and technology providers like GAN can carve out prosperous futures. Meanwhile, big technology companies like IGT and Scientific Games will have the benefits of size and diversified business models that can work much like the advantage the big land-based casino companies have.
- It’s not all on the come. There are companies making and growing profits today, like Catena. And in a world where the smaller operators have to fight against the deep pockets of Caesars and MGM-Entain and DraftKings, there is a wealth of prospective clients for affiliates.
NeoGames is another profitable company. The iLottery specialist and joint venture partner Pollard Banknote have won a big chunk of US state contracts. In the first quarter, NeoGames earned 16 cents a share and grew EBITDA 148 percent to $9.7 million on a 46.5 percent rise in revenues to $13.3 million.
The company is likely to win more contracts as more state lotteries go online. And if iLottery contracts are like conventional lottery contracts, the clients will stick and recurring revenues will flow.
In the end, the sell-off in digital gaming stocks is beneficial, as it gets investors closer to being able to select stocks more on their fundamentals than on blue-sky promises.
