The Bull, the Bear & the Bubble
Are gaming stocks riding high or riding for a fall?
QUANDARY: Maybe it’s just the summer doldrums, but I’m having a hard time getting comfortable with the stock market. On one hand, the market keeps rising. On the other hand, there’s all of this worrying news surrounding it. So, Bull and Bear, I’ve called you in hoping for some clarity.
BEAR: Well, it’s a good thing you did. This is no time to be complacent. Those rising stock prices you see, especially for anything that has artificial unintelligence attached to it, is a bubble. And all bubbles burst.
BULL: Not so fast, Bear. You’ve been down on the market throughout this bull run. In fact, so far you’re zero for 10 in calling for bear markets. And your record on forecasting positive trends is even worse.
BEAR: Okay. Look at these trends. Big-cap tech has lost its steam. Know what happens when markets lose their leaders? They soon lose their followers, too. And don’t say AI will save the day. Billions upon billions of dollars are being poured into AI infrastructure that has yet to produce a profit for anybody but is great at draining money from productive investment, slashing jobs and raising electrical bills. That’s not a formula for economic— or dare I say it?—stock market success.
QUANDARY: That’s exactly what’s got me worried.
BULL: Let me offer some reassurance if I can. AI will increase productivity. Everyone agrees with that. Productivity creates wealth. The stock market is both a driver and a beneficiary of wealth creation.
BEAR: Well, there you go. There’s a reason the term for nonsense is bullshit.
BULL: Oh, I thought the term was bear dung. At any rate, what we have today is profitable companies investing in the technology of the future. That’s not like the dot-com bubble that burst because too many tech darlings were money losers.
BEAR: You mean like money-losing Space X getting a $2 trillion market cap?
BULL: No, I mean like Nvidia. And if you want to use the dot-com bubble as your comparison, remember fortunes were still made then. Everybody dismissed Apple at the time as a closed system with a founder CEO who made Elon Musk look likeable. But Apple is up 1,300 times since the dot-com low in October 2002. And Amazon was dismissed as a perennial money-loser that prioritized revenue growth over profitability. It’s up about 275 times since then. So, the problem might not have been a bubble so much as the inability of too many investors to pick the winners.
And since we’re oriented toward gaming here, look at this sampling from the dot.com bubble low until today: U.S. regional casino operators Boyd Gaming and Penn Entertainment are up nine times each; suppliers Aristocrat and Flutter Entertainment are up 22 and 23 times, respectively.
QUANDARY: Guys, this is all very interesting history, but what I need to know is what the future holds.
BEAR: Well, gaming isn’t immune to bubbles. Just look at the iGaming and online sports betting stocks. Most are way down since the reality set in that handle doesn’t mean profit, nor does throwing money at fickle players on promotions, or player investment as the excuse-makers like to call it.
BULL: Nice try, Bear, but a lot of iGamers are doing just fine. Look at Rush Street Interactive and Super Group if you want examples. Digital gaming is like every other industry. Companies that execute correct strategies and respect balance sheet strength will thrive.
BEAR: And what about the dinosaurs… I mean land-based casinos? How long do you hang on to stocks that sell at five, six or seven times EBITDA before you admit you’re sitting on dead money?
BULL: It’s the same story. Some companies master strategy and execution. Look at solid profit growers like Red Rock Resorts and Monarch Casino and you’ll see higher valuations.
And while everybody’s fascinated by AI and digital this and digital that, remember people are people. They want real experiences. In fact, experiential travel is enjoying growth as people seek satisfactions that a cellphone can’t provide. That plays smack-dab into the strength of casino entertainment.
QUANDARY: Okay guys, you’re still not addressing my concerns. Is the market overvalued? And if so, and it corrects or even crashes, won’t it take down gamers with it?
BEAR: You’re asking me? Of course it’s overvalued. It’s starting to look like 1929, in my view. The justification investors—or speculators—give for investing in the stock market is that it keeps rising despite wars and inflation and the evidence of erosion among consumers. That’s classic bubble mentality: It’s going up because it’s going up.
BULL: But this time is different from the dot-com bubble because…
BEAR: Oh, boy. There you go. The classic bubble mantra: “This time is different.” We’re cooked.
BULL: You’ve got to put your money somewhere. I suggest putting at least some of it in gaming tech, just in case Mr. Ursine here is wrong. Then, buy the most well-run land-based casinos. They’re selling at giveaway valuations, generate solid positive cash flow and pay dividends to boot. Finally, they will benefit from the contra trend and human nature: people want real live experiences shared with other people.
And for those who say brick-and-mortar casinos are out of date, remember, everything old is new again.
QUANDARY: Bull and Bear, thanks for the debate. I think I’ll go take a nap now.
Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.
