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Sky is the Limit?

Recent developments give investors an idea of where-and how much-growth will occur

Sky is the Limit?

Our column in the July issue of GGB was based on the old adage that trees do not grow to the sky. It was mostly about the seemingly endless bullishness on Macau and its 20, 30 and 40 percent growth rates, and the related belief that growing numbers of players will keep coming faster than companies can build resorts to accommodate them.

No sooner was the virtual ink dry than reports drifted in that gaming revenue grew just 7.3 percent in May, and that revenue for the vaunted VIP segment barely budged.

Then, in June, revenues grew 12.2 percent, a mighty good figure anyplace else, but below the 20 percent during the first five months of the year in Macau, and the 15 percent many had expected.

And this slowdown came despite the first-phase opening of Sands Cotai Central, the grandest mass-market casino-hotel complex to date.

Indeed, equity analyst Brian McGill of Janney Capital responded by saying that the Las Vegas Sands’ grand Cotai project had become a non-event that didn’t grow the market, and is now looked at as a phased-in expansion.

Cotai Central might not generate the anticipated $500 million in EBITDA next year, he said.

Other analysts also have been lowering expectations. Assuming normalized trends, June results suggest growth of 13.7 percent in July and 10.6 percent in August, Gabriel Chan of Credit Suisse estimates.

Sterne Agee’s David Bain lowered his annual growth estimate to 18 percent.

So much for growing to the sky, at least in the near term. But Macau isn’t the only tree with stunted growth.

Regional Markets

We’ve become accustomed to a resumption of steady growth in U.S. regional markets, though with a wary eye at whether, and how much, new casinos are cannibalizing their older competitors.

But cannibalization aside, growth has slowed, as revealed in the National Revenue Report published by Fantini Research.

May was the second straight month that consumer spending softened.

Same-store revenues declined 1.25 percent from last May, though overall revenues grew 4.93 percent with new casinos in Atlantic City, Cleveland, Toledo and Kansas City, Kansas.

Both comparisons were weaker than the year-to-date figures going into the month of 6.2 percent overall growth and 0.42 percent same-store.

Comparisons were even weaker after factoring out Mississippi river county casinos, many closed last year because of flooding.

Subtract the river counties and regional same-store revenues fell 3.35 percent.

Another stunted tree.

Online Gaming

Then there is online gaming and the belief among many that it is destined to grow… well… to the sky. Much of that growth would come from new markets. However, a lot also is expected because the internet is a young industry.

But there may be cracks in that argument. Recent statistics hint at Facebook fatigue. And Zynga numbers are starting to look a little tired, too.

Indeed, speculation has been widespread that the Facebook IPO might have been the top of the wave for social gaming. And even if it isn’t, what are the barriers to entry?

Facebook might have the advantage of building the site that everyone goes to, but does the Zynga poker model have a moat around it when others can compete in the same space? Do we run the risk of clutter?

And, of course, at this time the convergence of social and real gaming is still more theoretical as neither Facebook nor Zynga has decided to enter cash gaming.

More pertinent than conjecture about Facebook or Zynga intentions is a slowdown in revenue growth that appears to be affecting some already in the online gambling business.

Ladbrokes, for example, dropped a bomb when it reported that online profits in the second half of its fiscal year will be half of those in the first half because of i-gaming.

The company blamed delays in new technology and low sports betting margins, and said the rest of its business will make up for the weakness, and that i-gaming growth will resume next year.

Investors, however, ran away. The stock plunged more than 12 percent the date of the announcement.

And governments aren’t helping out. Germany seems determined to tax sports betting into the ground. The U.K. is going to tax companies that are domiciled in low-tax jurisdictions. The U.S. continues to disappoint those looking for quick legalization.

Another tree stunted.

So, expectations for Macau remain strong long-term, though it’s worth noting that such reaction often greets the early days of a trend.

And the American economy, slogging along or not, should continue recovering, taking gaming companies along with it—assuming they don’t cannibalize each other.

And i-gaming will grow, surely several fold over time.

But the road isn’t always straight and level.  And those trees are nowhere near the sky.

So the moral of the story for investors is to cast a critical eye on confident predictions.


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