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The Zacks Gaming industry continues to bear the brunt of low visitation, and dismal Macau and Las Vegas gaming revenues. The industry participants are not only witnessing soft revenues but also decline in margin.

However, the reopening of the economy has been reinstating investor confidence. Meanwhile, the much-awaited coronavirus vaccine, the rollout of which has begun, is likely to bring the economy back on track. The industry players have been benefiting from robust demand for sports betting. Companies like Red Rock Resorts, Inc. (RRR - Free Report), Monarch Casino & Resort, Inc. (MCRI - Free Report), and Golden Entertainment, Inc. (GDEN - Free Report) are likely to benefit from the aforementioned factors.

Industry Description

The Zacks Gaming industry comprises companies that primarily own and operate integrated casino, hotel, and entertainment resorts. Some of the industry participants also offer technology products and services across lotteries, electronic gaming machines, sports betting, and interactive gaming.

3 Trends Shaping the Future of Gaming Industry

Dismal Visitation Hurts Performance: Gambling hubs — Macau and Las Vegas — has been witnessing dismal visitation due to the coronavirus pandemic. Although most of the casinos in Macau and Las Vegas have resumed operations following the coronavirus-induced shutdown, casino tables are still empty. This has resulted in a sharp decline in Macau gross gaming revenues (GGR) in November. Notably, gross gaming revenues from Macau fell to 6.75 billion patacas ($845.34 million) in November, down 70.5% from the year-ago period. The coronavirus pandemic has been impacting the gaming industry severely as most of the casinos are witnessing lower traffic on account of the outbreak. It is worth mentioning that the same was down 72.5%, 90%, 94.5%, 94.5%, 97%, 93.2%, 96.8%, 79.7%, and 87.8% in October, September, August, July, June, May, April, March, and February, respectively. In fact, revenues have declined in every month so far this year. Decline in gambling revenues from Macau is likely to impact companies, including MGM Resorts International (MGM - Free Report), Wynn Resorts, Limited (WYNN - Free Report), and Las Vegas Sands Corp. (LVS - Free Report), which generate majority of their revenues from Macau.

Vaccine Rollout to Boost Visitation: Following the rollout of coronavirus vaccine, casinos visitation should become a safe option and visitation is likely to increase. Since the lockdowns imposed in March, the U.S. economy has been operating at a significant sub-optimal level. Approval of vaccines will have a strong impact on the stock market. Moreover, the industry on a whole has been showing resilience courtesy of its increased focus on streamlining cost structures and optimization of business processes. Notably, companies have been focusing on the levels of services and staffing with selective amenities and enhanced safety and social distancing protocols in the gaming floor to welcome gamers.

Sports Betting to Drive Growth: 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. Moreover, bettors are now able to 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. Markedly, the applications have been an important medium for gamers to connect, learn, and inspire amid the stay-at-home restrictions. Per American Gaming Association, U.S. commercial gaming revenues for third-quarter 2020 were $9.04 billion, touching 81% of the industry’s pre-COVID levels in the prior-year quarter. Most of the gaming companies are focusing on sports betting to drive growth. We believe sports betting market is likely to witness sharp growth in the days ahead. Moreover, the US iGaming market is estimated to achieve revenues of nearly $6.9 billion by 2025.

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 #176, which places it in the bottom 31% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks from the industry that you may want to consider, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Gaming industry has lagged the broader Zacks Consumer Discretionary sector and the S&P 500 Index over the past year.

The industry has increased 4.5% over this period compared with the S&P 500 Index’s and the broader sector’s rally of 17.5% and 13.6%, respectively.

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 trailing 12-month EV/EBITDA ratio of 39.28 compared with the high of 39.63 in the past year and the median level of 13.68. Additionally, the industry is trading at a premium when compared to the market at large, as the trailing 12-month EV/EBITDA for the S&P 500 composite is 16.79X.

Over the past five years, the industry has traded as high as 39.63X and as low as 7.24X, with median being at 13.44X, as the chart below shows.

Enterprise Value-to EBITDA Ratio (Past 5 Years)

3 Zacks Gaming Pick to Keep an Eye On

Red Rock Resorts: Red Rock Resorts is engaged in casino entertainment, and gaming and entertainment businesses in the United States. The company’s Las Vegas operations have been a key growth driver over the past few quarters and the trend is likely to continue in the coming quarters. Although the segment’s revenues declined in third-quarter 2020 due to the pandemic, the company is confident regarding a quick rebound in its Las Vegas business. Moreover, attributes such as best-in-class assets and locations, unparallel distribution and scale, and solid organic development pipeline are likely to act as tailwinds.

Shares of this Zacks Rank #1 (Strong Buy) company have soared 131.1% in the past six months compared with the industry’s rally of 47.1%. Moreover, the company’s 2021 earnings are anticipated to increase 173.9%. In the past 30 days, earnings estimate for 2021 has been revised upward by 16.5%. 

Price and Consensus: RRR

Monarch Casino & Resort: The company through its subsidiaries, owns and operates the Atlantis Casino Resort Spa, a hotel/casino facility in Reno, NV, and the Monarch Black Hawk Casino in Black Hawk, CO. The company is committed to delivering the ultimate guest experience by providing exceptional services, and the latest gaming, dining, and hospitality amenities. Moreover, it has been benefiting from robust rated guest visits and spending per visit.

Shares of this Zacks Rank #1 company have gained 73.4% in the past six months. Moreover, the company’s 2021 earnings are anticipated to increase 202.5%. In the past 30 days, earnings estimate for 2021 has been revised upward by 19.6%.

Price and Consensus: MCRI

Golden Entertainment: The company together with its subsidiaries, owns and operates a diversified entertainment platform in the United States. The company has been gaining from robust performance of Las Vegas locals casinos, which witnessed double-digit revenue growth in third-quarter 2020. The company is also benefiting from strong performance of Laughlin and Pahrump casinos.

Shares of this Zacks Rank #1 company have appreciated 119.7% in the past six months. Moreover, the company’s 2021 earnings are anticipated to increase 91.6%. In the past 30 days, loss estimate for 2021 has narrowed to 38 cents from $1.29.

Price and Consensus: GDEN