Gaming stocks are being hit again as Covid-19 cases spike in Nevada, its biggest feeder market, California, neighboring Arizona and elsewhere.
Fear of the virus has offset the optimism over gaming revenues, which were higher than expected in the casinos that recently reopened. The question is: how long can business hold up as the realities of high long-term unemployment settle in, and as other forms of entertainment reopen to compete for consumer dollars?
In several weeks, when second quarter earnings are released, we’ll learn more whether the combination of better-than-expected play and lower expenses will allow casinos to be cash flow-positive, as several CEOs have said.
One group of companies that will be watched closely are the regional casino operators.
The supposition is that regional casinos will recover sooner and stronger than destination resorts, because they’re in drive-to markets and less tourism and convention-dependent. That point of view has been repeated so often, it almost seems to be a given.
We’ll see. The early encouraging revenue reports are just that—encouraging. They are not proof that revenues can or will rebound to levels that sustain profitability and growth.
Further, the anecdotal evidence is also starting to run in reverse. Gila River Indian Community closing its three Phoenix area casinos is one significant example. Employees testing positive for Covid-19 at several casinos throughout the country are another. Bars and taverns in Boise, Idaho, are closed again. In other words, at any time, the brakes can be applied and the engine thrown into reverse.
Destination resorts also face an uncertain near-term future. The nearly blithe assumption that Macau would open to travelers hasn’t happened. Instead, travel restrictions continue to be extended. Disney is postponing the reopening of theme parks. The whack-a-mole nature of Covid-19 is throwing wrenches into the plans of sports leagues that want to resume play.
And the overall environment remains difficult. The latest initial applications for unemployment claims, after weeks of positive surprises, exceeded forecasts. In the newest Destination Analysts survey, 66.9 percent of respondents said they would feel somewhat or very unsafe entering a casino.
So, the theme to look for in upcoming second quarter investor conference calls will continue to be the ability of companies to manage through to the other side.
It’s An Ill Wind…
…that doesn’t blow somebody some good, so investors have to ask how to make money out of this.
For weeks, the answers have been stay-at-home products and services from Zoom to Peloton to Amazon.
In gaming, the equivalents are online gambling and sports betting.
One question is whether to buy the stocks of large companies where online and sports betting growth, while significant, might not be big needle-movers, or to try to find the little guys with explosive growth potential like GAN.
Yet another avenue is to search for merger-and-acquisition candidates. There have been a number of acquisitions in the online and sports betting world, many of private companies as Flutter buying FanDuel and Penn National buying into Bar Stool.
But as shown by live online casino operator Evolution Gaming, which offered to buy online slots company NetEnt for $2.1 billion, public companies can play both sides of the M&A game.
The key motivation behind such mergers will be convergence. Companies want to be full-service providers—online casinos, sports betting, poker. Taking it a step further, brick-and-mortar operators will look to buy online operators or vice versa.
The physical and virtual worlds will meld. We’ll have universal gaming companies offering every way a bet can be made or a game played: brick-and-mortar, online, slots, tables, sports betting, social.
That creation of the universal gaming provider will be the theme beyond the stay-at-home Covid-19 play.
