Call it weak hands.
Call it profit-taking.
Call it all the good news was in the stock.
Call it a return to reality.
Whatever you call it, the stocks of casino companies and U.S. companies pursuing interactive businesses have been selling off, most recently spurred by investors reacting to generally positive earnings reports.
This sell-off wasn’t entirely unexpected. At least in this corner. You may recall that I predicted in advance of the third-quarter reporting season that stocks might sell off, even on good news.
The rationale was simple: Stocks had soared so high on the euphoria over sports betting and the excitement over the recovery of casino business volumes and profitability that investors could naturally ask, “Where do we go from here?”
The answer is: back to a world where stocks sell on fundamentals.
On the sports betting/iGaming side, it’s clear that many investors have sobered up. They’re considering the time value of money and the risk of investing in companies intending to lose large sums while waiting years for a payoff that might not come.
An example of this reality check was a recent equity analyst’s report listing the major operators in the sector and their possible market shares, several years out. Add all the shares together, and you arrive at 140 percent. Such an outcome is a mathematical impossibility.
Now, this was not a prediction that each company would reach those shares, but it surely illustrated that investing based on projections made on assumptions several years out is a speculative business. When those projections are over 100 percent, something will give. No question. The only questions are, to whom and by how much?
The case of brick-and-mortar casinos is different. They’re making money, in many cases more than ever before.
The sell-off, as mentioned above, may be more a matter of investors figuring that the best news is in the stock prices, so it’s time to sell and capture profits, or that weak hands get scared off when investors realize that expenses will rise and margins will come down from record highs, even if they remain well above historical levels.
This column was written on November 4. On this day, U.S. casino stocks of all shapes and sizes got slaughtered.
Golden Entertainment reported record earnings and gave a pound-the-table bullish outlook. The stock fell 5.21 percent.
Caesars gave an equally bullish outlook. Its stock fell 0.94 percent the next day, then 6.89 percent on the 4th.
Bally’s disappointed in part because of one-time effects like hurricanes and wildfires at certain properties. Its stock fell 5.73 percent, perhaps as investors once optimistic about its iGaming ambitions are now more cautious about Bally’s investing free cash flow into trying to establish online market share.
Penn National missed earnings expectations and got hit with the news that flamboyant sports betting partner David Portnoy is the subject of sexual violence allegations. The combination tanked the stock 21.08 percent, a $2.5 billion loss of market value.
As readers of this space know, I have long advocated for the stocks of well-run brick-and-mortar casino companies that are not chasing the iGaming dream such as Golden and Monarch Casino. And in that category we can add others like Red Rock Resorts.
That doesn’t mean that online gaming is not a great opportunity. Certainly, Caesars CEO Tom Reeg makes a compelling case for how his company can capture significant market share and achieve 50 percent margins, too. And I have my investments in interactive pure plays like Rush Street Interactive and GAN.
What it means is that this sell off is welcome news by getting the giddiness out of stock prices. The strong hands holding shares in prudently run companies with growth strategies will be rewarded.
