The Zacks Gaming industry is gradually recovering from the pandemic blues. Although Macau, Las Vegas and Singapore are showing signs of resurgence, revenues and traffic from the regions are still below the pre-pandemic level. The industry players have been benefiting from robust demand for sports betting. Stocks like Accel Entertainment, Inc. ACEL, Zynga Inc. ZNGA and PlayAGS, Inc. AGS are likely to benefit from the aforementioned factors. The Macau government has also proposed new amendments with respect to gaming concession renewals. The announcement eliminates the fear of potential dilution of existing casino operators in the region. The new rules are subject to approval by the Macau legislature.
Industry Description
The Zacks Gaming industry comprises companies, which primarily own and operate integrated casino, hotel, and entertainment resorts. Some industry players also deliver technology products and services across lotteries, electronic gaming machines, sports betting and interactive gaming. Some industry participants develop and operate gaming establishments, as well as associated lodging, restaurant, horse racing, and entertainment amenities. Some companies are also involved in the development as well as the sale of gaming applications and provide e-sport or sporting event or tournament services; offers content management system, video software, mobile applications, and e-sports data platform solutions.
Key Themes Shaping the Gaming Industry
Visitation Still Blow Pre-Pandemic Level: Traffic has been a major cause of concern for the gaming industry since the coronavirus pandemic. However, the industry is gradually coming out of the woods. In 2021, Macau casinos' performance was better in comparison to 2020, but still well below the pre-pandemic level. In 2021, Macau’s gross gaming revenue (GGR) totaled $10.82 billion, up nearly 44% year over year. However, the 2021 annual figure is still 70% below the pre-pandemic. The companies have been focusing on services and staffing levels with selective amenities and enhanced safety and social distancing protocols on the gaming floor to welcome gamers.
The U.S. Commercial Gaming Revenues Hit Record Level: The gaming industry in the United States is recovering faster than anticipated. According to data from the American Gaming Association, revenues from gambling hit a record high of $13.89 billion in the third quarter of 2021. In the first nine months of 2021, gambling revenues have totaled around $38.67 billion. Gambling was already flourishing in the United States till the pandemic hit early last year. Prior to that, in 2019, revenues from gambling hit a record high of $43.65 billion. According to the report, 10 of the 25 states where gambling is allowed, witnessed record quarterly revenues in the third quarter. The U.S. gaming industry will continue to improve in the next six months.
Sports Betting Likely to Act as Key Catalyst: The legalization of sports betting in Delaware, Mississippi, New Jersey, New Mexico, West Virginia, Pennsylvania, Rhode Island, Montana, Indiana, Tennessee, Illinois and New Hampshire has been driving growth. Bettors can place wagers through the digital platforms in Connecticut, Kentucky, Michigan, Massachusetts, Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona, Montana, Colorado and other states. Some of the popular igaming applications include DraftKings, Barstool, FanDuel, BetMGM, BetRivers, Fox Bet and BetMonarch. The applications have been an important medium for gamers to connect, learn and inspire amid the stay-at-home restrictions.
Macau's New Gaming Law Reforms: Although the coronavirus-induced uncertainty looms over the Macau Gaming industry, the government’s proposed new amendments with respect to gaming concession renewals have provided some respite. The announcement removes the apprehension regarding the potential dilution of existing casino operators in the region. The new rules are subject to approval by the Macau legislature. According to a ggrasia.com report, the number of new casino operators allowed to operate in Macau has been limited to six concessionaires with a maximum concession period of up to 10 years. The option of extending the duration (by three years) has been made available by the government under exceptional circumstances. The rule acknowledges local ownership of casinos to 15% (from 10% earlier) and the non-mandatory presence of a government official to sit on the company board.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Gaming industry is grouped within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #188, which places it in the bottom 26% of more than 254 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential.
Despite the industry’s drab near-term prospects, we will present a few gaming stocks that one can add to portfolio given their strong fundamentals. But it’s worth taking a look at the industry’s shareholder return and current valuation first.
Industry Underperforms and the S&P 500
The Zacks Gaming industry has lagged the S&P 500 Index and the broader Zacks Consumer Discretionary sector over the past year.
The industry has declined 21.2% over this period against the S&P 500 Index’s growth of 16%. The sector has slumped 19.7% in the same time frame.
One-Year Price Performance
Gaming Industry's Valuation
Since gaming companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. The industry currently has a forward 12-month EV/EBITDA ratio of 14.31. The space is trading at discount compared to the market at large as the forward 12-month EV/EBITDA ratio for the S&P 500 is 16.48.
Over the past five years, the industry has traded as high as 16.69X and as low as 6.54X, with the median being at 10.75X, as the chart below shows.
Enterprise Value-to EBITDA Ratio (Past 5 Years)
3 Zacks Gaming Stocks to Add to the Portfolio
Accel Entertainment: Headquartered in Burr Ridge, IL, Accel Entertainment operates as a distributed gaming operator in the United States. The company provides licensed establishment partners with gaming solutions that appeal to players who patronize those businesses. The company has been benefiting from an increase in video gaming terminals. At the end of third-quarter 2021, the company had 13,384 video gaming terminals, up 15% year over year.
Shares of this Zacks Rank #2 (Buy) company have gained 27.6%. ACEL’s 2022 earnings are anticipated to increase by 32.9%. In the past 90 days, earnings estimates for 2022 have been revised upward by 6.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: ACEL
Zynga: Based in San Francisco, CA, Zynga Inc. is a leading developer, marketer, and publisher of social game services. Strength in its diversified portfolio of live services has been driving Zynga’s growth. Also known as forever franchises — CSR Racing, Words With Friends, Zynga Poker, Empires & Puzzles, Merge Magic! and Merge Dragons! — have been acting as key growth drivers. Contributions from new forever franchises — Toy Blast and Toon Blast, which Zynga acquired through the buyout of Peak, are expected to aid player base expansion in the long haul.
Shares of this Zacks Rank #2 company have appreciated 21.2% in the past three months. ZNGA’s 2022 earnings are anticipated to improve by 1.9%. In the past 60 days, the earnings estimate for 2022 has moved north by 2.5%.
Price and Consensus: ZNGA
PlayAGS: Headquartered in Las Vegas, NV, PlayAGS designs and supplies gaming products and services for the gaming industry in the United States and internationally. AGS has been benefiting from a strong line-up of new products. Robust domestic and international revenues per day have also been aiding the company.
Shares of this Zacks Rank #2 company have surged 51.2% in the past the past year. The company’s earnings in 2022 are likely to witness growth of 63%.
Price and Consensus: AGS
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