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A Calm Year?

Views on the financial expectations for 2024

A Calm Year?

Barring the always possible black swan event, 2024 looks like it might a relatively calm year for gaming.

Covid has played out, inflation may be on its way out. The economy is slowing with moderately negative effect on regional gaming revenues. Land-based gaming in the U.S. is a mature industry with pockets of growth but also pockets of cannibalization as new properties open. Casino operators have gotten both expenses and debt under control.

Online sports betting and iGaming continue to grow, though the pace of growth has slowed, which is just as well in that companies have come to understand that it is time to manage for profitability, not just chase higher revenues and market share as though they are ends in themselves.

While gaming technology and game development are ever-changing, what has settled in is the Big Three—Aristocrat, Light & Wonder and IGT. They have consolidated their leadership. The upstarts have largely become the up-stops. Simply announcing new games and cabinets is no longer a cause for boosting a stock in a market saturated with new products.

The Las Vegas Strip appears to have achieved a new and sustainable level of business volume while more than 4,000 people a month moving into the Las Vegas Valley steadily lift the nation’s biggest locals market.

Internationally, we’ll learn about the Macau recovery this year. Has it largely run its course? Is there a new Las Vegas-like paradigm less reliant on high rollers that promises many years of growth? Will Macau’s future be limited by growth of competitors like Singapore and the Philippines? Will mainland China forever remain a hovering force of both great opportunity and government policy risk?

Here are some thoughts on these questions and observations.

  • Regional casinos. If stock prices have been flattish it’s because business has been flattish, with online growth offsetting brick-and-mortar declines in many cases. It’s an environment where blocking and tackling become more important, which is an area where Boyd Gaming and Churchill Downs excel. They also have some growth projects to further goose prospects, and BYD lives in the growing Las Vegas locals world, too. From a stock investor’s perspective, the most interesting operator is little Full House Resorts, which is very much a high-risk, high-reward play. The stock got beaten down to around $5 this year. A price more like $15 to $20 seems likely a year from now.
  • Las Vegas Strip and Macau. We group these markets not because of their similarity but because they determine the prospects for the biggest operators—MGM Resorts, Wynn and Las Vegas Sands sans Las Vegas, and Caesars sans Macau.
    As mentioned above, the Strip appears strong and Macau is recovering, but still a question mark as to how big and profitable it can become.
    Each of these companies can make a case for its mid- to long-term future but we don’t see anything that will particularly move any of them in the year ahead.
  • Las Vegas locals. It’s hard not to like Red Rock Resorts strategically. The company has a clear growth plan—double capacity in the growing market, continue to develop amenities for the region’s growing affluent population, and become even more local by developing smaller properties, as well.
    The other pure Las Vegas locals play is Golden Entertainment, long a favorite of ours and a company with growing cash that it intends to return to shareholders as it looks for growth opportunities.
  • Gaming technology. As mentioned, this is the era of the Big Three. It’s hard to beat their management that, along with their vast resources, gives them nearly unassailable positions.
    A case can be made that Aristocrat stock reflects its strength, but that argument can always be made about a great company by investors who end up missing out on long-term growth. And IGT’s future is yet to be resolved in some future spinoff or sale of its gaming operations. That leaves Light & Wonder as the best near-term opportunity for investors.
    For the coming year, two small companies are interesting, AGS and Inspired Entertainment.
    AGS continues to bring out strong new products and the company is focused on its bottom line. A significant rise in the stock price in 2024 is possible as investors learn of, or gain confidence in, the story. Inspired is the Full House Resorts of the games sector. It is highly speculative and, as of this writing, we don’t know whether the reauditing of its revenue recognition issues will result in minor adjustments or a serious hit to past and future earnings. But if INSE breezes through that issue, it resumes being one of the potentially best little-known growth stories in the space.
    Finally, we really like a couple of the privately owned companies and would eagerly welcome an IPO by Interblock or Bluberi. The former leads the industry in the ever-emerging electronic table game space and the latter has the knack for developing hit slot games despite its relatively small resources.
  • Sports betting and iGaming. After the first several tumultuous years of legalized U.S. sports betting, the future is finally here, and it is named DraftKings.
    DraftKings and FanDuel clearly dominate online sports betting share, followed by a perhaps fading BetMGM. Everyone else is well behind. And there is little reason to believe anyone will threaten the titans, though Penn Gaming’sESPNBet and privately owned Fanatics will make big runs at them.

    Finally, one hedged way to play the space are two brick-and-mortar casino operators that can combine the power of their huge customer databases with their focus on online profitability—Caesars and Boyd.

  • Gaming REITs. We can’t close out a look into the new year without mentioning two of our favorites—Gaming & Leisure Properties and VICI Properties. They are prudent, have rock-solid tenant bases, are somewhat protected in their leases from inflation, offer modest but nearly certain capital gains, and pay high and growing dividends.

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