It’s been a bear market for gaming companies thanks to our old friend COVID-19 (and it is getting old).
There has been a recent rally in gaming stocks, prompted in large part by the Greek chorus of optimism on second quarter investor calls. “We’re growing EBITDA on lower revenues. We will continue doing so after business normalizes,” CEOs chanted.
Even with that rally, most gaming stocks remain well below their pre-COVID levels.
Most, but not all. In fact, some stocks are soaring. And they’re doing so at least partly on the come. They are stocks touted for their sports betting and interactive potential.
A year ago, the action was like the Wild Wild West. Swedish and UK online gamers, most just vaguely known to US investors, sent exploration parties to the American continent to try to discover how to get in the game of legalized sports betting that states were starting to adopt.
This year has been different. Much of the excitement has been created by American companies and the belief that many jurisdictions will legalize online gaming along with sports betting.
The resulting activity has been nearly frenetic. Consider:
- DraftKings has gone public and now has a market cap approaching $12 billion.
- Golden Nugget is spinning off its online operations into a public company through the increasingly popular device of technically being acquired by a special purpose acquisition company. It is to be valued around $750 million at the IPO.
- Rush Street Gaming likewise is spinning off its interactive business into a public company, also going the SPAC route, as we are learning to call these entities. It will be valued around $1.8 billion at launch. Rush Street Interactive, which expects to do $226 million in revenue this year, thinks it may eventually do $1.5 billion to $2.3 billion in the US at EBITDA margins of 25 to 29 percent. And it is playing in emerging Latin American markets, too.
- Penn National stock has soared to all-time highs and a market cap over $7 billion on excitement for the potential of its investment in BarStool Sports, an app that PENN is using to market sports betting.
Near-term, the stock is helped by CNBC’s Jim Cramer repeatedly pounding the table on PENN, no doubt driving many retail investors to it.
- Churchill Downs has hit an all-time high of $7 billion in market value as it develops its TwinSpires online product and its sports betting platform.
- Caesars stock has equity analysts forecasting a doubling or even tripling in price as they try to calculate the power of its vast player database combined with the sportsbook management of William Hill US, of which CZR owns 20 percent.
The valuations being given to these emerging operations are not cheap and reflect the growth investors expect. Rush Street, for example, will go public at 5.6 times revenues. Golden Nugget will go at 6.1 times estimated 2021 revenues.
All of this is happening under leadership of some very experienced and successful businessmen like Rush Street Chairman Neil Bluhm and Golden Nugget CEO Tilman Fertitta. These aren’t starry-eyed kids trading fractional shares on Robin Hood. They are among the soundest businessmen in America.
The roster of big names now includes Barry Diller whose IAC bought 12 percent of MGM Resorts motivated by optimism over online gaming.
In other words, valuations might seem high and companies might be betting on the come, but some very shrewd minds see a lot of money to be made in US sports and online gambling.
