There is considerable debate among investors and the business press today about whether the U.S. is headed into an economic recession, a soft landing or whether we’ve already run past the risk into no landing at all.
The gaming industry is in the middle of this debate as a consumer discretionary industry that would be directly affected by a recession.
However, investors seem to have an almost complacent attitude, perhaps because of all of the false alarms over a recession in the past year or more. Perhaps, also, because of the belief fed by headlines in the general business press, that Las Vegas is booming and Macau has reopened, so all must be right in the world of slot machines and card dealers. That is fed by enthusiasm over November’s Formula 1 race coming to Las Vegas followed by the Super Bowl in February as though those singular events in one city translates into good times for the full industry and for the foreseeable future.
But a look at recent trends suggests the brick-and-mortar casino business is already in a soft spot if not the early stages of recession.
Factor out emerging forms of betting such as sports, digital and historical horse racing (HHR) and gaming revenues are down in many places. Look at the latest reports, a whopping 11.56 percent decline in Mississippi and over 10 percent in downtown Las Vegas and in the Las Vegas locals markets, as examples.
Even the Las Vegas Strip dipped in June, though perhaps understandably when compared to a whopping June 2022.
In Macau, while every day brings a new headline about gaming’s rebound, gambling revenues are still a third below pre-COVID. Further, despite the optimism that casino executives express, there is no assurance revenues will fully recover and then grow from there; but there is assurance that operators will spend more money on non-gaming projects in large part to appease the Macau government that, in turn, wants to appease the national government of China.
The unevenness, or softness, in domestic brick-and-mortar gaming revenues is coming in the face of higher costs, especially labor, and threatens to shave some of the margin improvements that casino operators have so proudly touted. Meanwhile, if a significant downturn does occur there will be fewer places in which to cut when so many costs have already been cut. As mentioned in this space before, you can only close your buffet one time.
Further, cost cuts might begin to affect suppliers. The latest Eilers-Fantini Quarterly Slot Survey found casinos intend to replace 6.7 percent of their slot machines in coming months. That is down from 7.1 percent in the first quarter and 7.5 percent pre-COVID. The good news is that actual sales tend to be higher than reported forward expectations. Still, some conservatism could spill over from operators to their suppliers.
Of course, the gaming world is bigger now than physical casinos. Sports betting and online wagering are significant growth businesses and HHR is proliferating.
And new technologies, such as cashless gaming, will both bolster the sales of suppliers and bottom lines of operators.
So, even in a recession there will be growth opportunities.
However, unlike past periods such as regional expansion and then ticket-in-ticket-out, there doesn’t appear to be a rising tide to lift all boats.
In other words, for gaming equity investors, we appear to have entered a stock picker’s market.