Analysts at Zacks project a bright future for online gaming. The Zacks gaming industry is comprised of companies whose primary interest is owning and operating casino resorts. A few of the companies that Zack tracks also offer online and mobile products including lotteries, sports betting, and online gaming.
Among the companies that Zack analysts tracks are major players including MGM Resorts International (MGM) Las Vegas Sands Corp. (LVS), Wynn Resorts, Limited (WYNN), and International Game Technology PLC (IGT).
The coronavirus shutdowns hit the world’s gambling hubs, Atlantic City, Las Vegas, and Macau, very hard. While most of the casinos in these hubs have reopened, they are operating under many restrictions, which makes vacationing at a resort-casino in the “new normal” not much fun.
Macau’s Casino Industry is in Poor Shape
Due to this, July gross gaming revenues in Macau, the world’s largest gambling hub, fell into a sharp decline. Notably, gaming revenues in Macau fell sharply for the tenth consecutive month. Moreover, gross gaming revenue fell more than 90% for the fourth consecutive month. July gaming revenues for Macau plummeted 94.5% to just $162.89 million. However, that’s a slight improvement following June’s 97% decline.
Macau’s financial troubles can primarily be blamed on the cancellation of soccer games, as China continues to refuse team visas as a coronavirus safety precaution. That has hit Macau’s sports betting industry very hard. The Chinese government is also strictly enforcing masks and temperature checks at casino entrances, which is keeping visitors away.
Unfortunately, Macau officials have been continuously “studying” legalizing online gaming since at least 2016; unlike Atlantic City or Las Vegas, online gaming and sports betting is not legal in Macau.
In April, Macau Special Administration Region Chief Executive Ho Iat Seng said the Chinese government is “still studying” online gaming as a way to diversify Macau’s gaming revenue. Even though online gaming websites are serving Macau, these are not sanctioned by the Chinese government.
Fortunately, the worst seems to be over for Macau, as China slowly eases up on coronavirus restrictions. More importantly, Macau has begun issuing tourist visas from Mainland China again. Macau is a special administrative region of China like Hong Kong, and it’s unclear when visas will be issued to tourists from outside China.
Sports Betting is a Lucrative Market
A few years ago, when the Supreme Court overturned the Professional and Amateur Sports Protection Act banning sports betting outside Nevada, legalized sports betting quickly took off all across the country.
The scope of sports betting for US casino operators will only continue to grow; the sports betting industry is currently valued at many billions of dollars in the US.
As of this report, sports betting is now legal in Nevada, New Jersey, Delaware, Pennsylvania, Mississippi, New Mexico, Rhode Island, West Virginia, Indiana, Montana, Ohio, Illinois, Tennessee, and New Hampshire.
Moreover, Arizona, Connecticut, Michigan, Kentucky, Maryland, Massachusetts, Minnesota, Missouri, Louisiana, Kansas, South Carolina, Oklahoma, Oregon, California, Colorado, Montana, and other states are likely to legalize sports betting in the next year.
Right now, most online gaming companies are focusing on developing their online sportsbooks to drive growth. Zacks analysts believe the sports betting market will likely experience a sharp growth in the coming months.
Moreover, the US online gaming market is predicted to achieve revenues of nearly $7 billion by 2025.
Zacks Shows Bright Prospects for Online Gaming
The Zacks gaming industry carries a Zacks Industry Rank of 119, placing it in the top 47% of more than 250 industries Zacks tracks.
The Zacks Industry Rank is the average of all of the member stocks Zacks analyzes, and indicates drab near-term prospects. Zacks research demonstrates that the top 50% of the Zacks-ranked industries outperform the bottom 50% by more than 2 to 1.
Online gaming and sports betting is the driving growth factor for the gaming industry as a whole.
The Gaming Industry Lags Overall
Over the past year, the Zacks gaming lags behind the broader Zacks Consumer Discretionary Sector as well as the S&P 500 Index.
The gaming industry has declined 3.7% compared to the S&P 500 Index rally of 15.5% and the Consumer Discretionary Sector’s rally of 6.3%.
The Gaming Industry’s Valuation
Gaming companies are notoriously debt-laden, so it only makes sense to value them based on the Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization ratio.
Currently, the gaming industry has a trailing 12-month EV/EBITDA ratio of 22.04 compared with the last year’s high of 22.16 and a median level of 12.1. Moreover, the gaming industry is trading at a premium compared to the rest of the market, since the trailing 12-month EV/EBITDA for the S&P 500 composite is 12.74X.
Over the last five years, the gaming industry has traded at more than 22.15X and as low as 7.75X, with a median of 13.27X.