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Under Pressure

What impact do regulators and legislators have on the valuation of gaming companies?

Under Pressure

The stocks of regional casino companies have historically traded at low valuations compared to their destination resort peers in Las Vegas and sister industries like hotels.

On the surface, it would seem casino valuations should be higher than those of hotel companies. They are, after all, hotels themselves that happen to enjoy the kicker of a casino being attached.

That discrepancy is usually attributed to legislative risk. Owners of hotels don’t have to worry about state legislators slapping punitive taxes on them or changing the rules of the game after the big investments have been made. Casinos do.

Those relatively low valuations have remained even as the regional casino industry is now decades old and the legislative environment has long since settled down. Indeed, casinos today are part of the economic establishment, with their lobbyists in state capitals successfully guarding to protect tens of thousands of jobs and many millions of dollars in tax revenues.

Today a new branch of the gaming industry has legislative risks, too. That is online sports and casino wagering.

It wasn’t long ago when online gaming was anathema to many, including some in gaming such as the late industry titan Sheldon Adelson.

The fear was that widows and orphans would spend themselves into ruin from their homes without ever stepping out into the light of day.

My, how things have changed. Now, many states are rushing to legalize online gaming. Former adamant opponents such as major league sports teams are falling over each other to sign marketing deals with gaming companies and even to host and operate sportsbooks.

Gaming companies eager to establish market positions are spending themselves into big deficits as they fight to be part of a highly profitable oligopoly once the inevitable industry consolidation occurs.

Investors, euphoric over the massive size of total addressable market, are pouring funds into these money-losing operations.

While brick-and-mortar casino operations continue to receive valuations of seven and eight and nine times actual, proven EBITDA, online gamers are selling at 10 and 20 and 30 times projected revenues and even higher valuations of future EBITDA several years out that might never come.

And in a world where revenue-hungry states are still legalizing online gaming, legislative risk is hardly, if ever, mentioned.

But the risk is there. And it might be big. All one has to do is look at Europe, where countries are cracking down on TV advertising, limiting the amounts of money that can be deposited into player accounts or that can be lost, limiting ways to access funds, and slowing down the spin of online slots so fewer games can be played in a period of time.

In some cases, the new restrictions are having material negative effect on gaming revenues.

When I raise these issues with gaming operators and even regulators, the answers are that America is ahead of the responsible gambling curve, so the risk of material restrictions being imposed is unlikely.

We’ll see. As a resident of Florida, I do not see much of the promotion of online gaming on TV except in signage at ballparks and arenas and contests sponsored by the likes of DraftKings.

However, on a recent trip to the Philadelphia area, where sports betting is legal, I got the opportunity to view sports betting advertising.

I especially noticed an ad from PointsBet in which an attractive young blonde woman emphasizes the fast service the company provides. Fast, fast, fast is the theme, including fast to bet and fast to win money. The young lady is alluring and the message is appealing.

It is a good ad. However, as someone who is certainly no prude about gambling, I found the ad a little concerning.

If it were advertising fast, fast, fast mortgage loans or car loans or even payday loans, it might not engender the same reaction. But I asked myself, is this the kind of appeal we want to make on prime-time TV when kids are watching?

Now, I do not cite this ad to single out PointsBet. They simply produced an effective ad for a legal product. But it does raise the question of whether gambling advertising will face further regulation.

The Covid pandemic is fading, and the motivation for states to legalize online gaming as a new form of revenue might fade with it.

Meanwhile, we might see new concerns, perhaps sparked by phenomena such as the calls to gambling problem hotlines quintupling in Michigan in its first few months online.

If that pattern repeats and grows as online gambling proliferates it will worry parents, anti-gamblers and society more broadly. Then, the kinds of restrictions we see being imposed in so many European countries might find their way to America.

The message to investors: Don’t be complacent about legislative and regulatory risk. The total addressable market is only theoretical. It is just a mathematical calculation of expected revenues multiplied by population.

Prudence might factor in legislative and regulatory risks.

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