Risky Business
You can’t change the rules of a game after it starts—unless you’re a legislator.
It’s called legislative risk, and it’s a big reason gaming stocks of all kinds and in lots of different places worldwide have been in a funk.
Here are a few examples.
The United Kingdom has doubled its online gaming tax and now may double the tax on gaming machines.
The president of Brazil wants to kill online gaming in a market of 215 million people just a year after it opened to great fanfare.
Unregulated and untaxed gambling such as prediction markets and sweepstakes machines are growing in the United States to compete with regulated and taxed gaming.
And these are just three major markets, including two—the U.S. and U.K.—where reliable laws and regulations are considered givens in creating predictable business environments. Other nations have also raised taxes, imposed loss limits and restricted gambling advertising. More changes are coming in a slew of other countries, too. (In Brazil, as of this writing, the anti-gaming president could be voted out of office.)
That governments taketh away as well as giveth is not new. Even in the early days of riverboat casinos in the American heartland, legislatures frequently changed the rules and conditions for gamers.
This legislative risk was understood by investors wary that a state might reduce a franchise’s value by authorizing a competitor across the river or by raising gaming revenue taxes. The result was that, while the stocks of other hospitality sectors sold at 12 or 15 times EBITDA, the stocks of even growing gaming companies in the U.S. sold in the single digits.
That seeming undervaluation mainly applied to regional U.S. casino operators. Those based in huge gaming meccas, like Las Vegas and Macau, sold at prices more in line with their abundant cash flows and optimistic growth prospects.
Then the world changed.
Covid knocked Macau for a loop, and the government in its casino concession renewals required that casinos invest in non-gaming amenities to help diversify tourism and the general economy. There was also a crackdown on junket operations, which brought in the highest of the high rollers. As a result, the strong visitation and hotel occupancy rates so happily announced every month by the government don’t tell the full story as lookie-loos and grinders replace profitable gamblers.
So much for the wisdom of forcing companies to spend money to, in effect, finance competition.
Covid also nearly shut down Las Vegas for a while, but the real problem is that the drive-up-the-margins-at-any-cost casino operators alienated prospective customers. To some extent, Las Vegas has lost its mojo. A city with a brand built on the fun of freebies and low-cost buffets now ironically cheapens that brand by holding hotel room-rate sales. What too many executives don’t understand is that there’s a difference between affordable fun as the reason for being and lowering prices to goose revenues temporarily while otherwise sticking it to visitors with high prices and charges on everything.
During this erosion in industry fundamentals, investors were preoccupied with the explosion of online sports betting and online casinos. As in the early riverboat days, online revenues soared and investors jumped in with both feet. But, as with riverboats, revenues do not necessarily mean profits. Those riverboats quickly lost their allure for investors as gambling money flowing in went out to pay off the junk bonds that financed them. Thus, casino companies that IPO’d at, say, $12, would end their first day of trading at $60, then crash to $1 or $2 or $4 a share.
In the case of online sports betting, the big gambling revenues that rocketed stock prices in the early days went back out in the form of huge promotional costs as companies fought for market share. Stocks then sank.
That brings us to today, where route-like gaming in taverns and social clubs along with sweepstakes and prediction markets are proliferating to take money away from casinos built and operated at great expense.
Meanwhile, there’s another force gathering. It might be called a prohibition mentality.
Not long ago, attention was on gaming expansion, especially online. It was expected that as governments sought pain-free sources of revenue they would further legalize gaming. To some degree, that’s still happening.
However, we’re starting to see more jurisdictions globally raise taxes, sometimes drastically as noted in the U.K. We’re seeing warnings that the easy access to online wagering is building a public opinion backlash. We’re seeing the first restrictions such as implementing loss limits and limiting sports betting advertising. We’re seeing what might be the early stages of a public opinion revolt against online gaming.
How this flux of gambling expansion, new forms of gambling, ever-evolving technology and ever-changing public policy works out is uncertain. But what does appear likely is that legislative risk will continue, causing investors to put a damper on the valuations of many gaming stocks.
Frank Fantini is publisher emeritus of Fantini’s Gaming Report. Reach him at [email protected].
