There ’ s plenty of opportunity to buy companies at prices higher than the stock market is giving them and still make a profit .
FANTINI ’ S FINANCE
Searching for Answers
Investors look for strategies that will rise gaming stocks out of their malaise
BY FRANK FANTINI
If you want evidence of the sad state of gaming stocks , the first half of the year gave it to you . While the S & P 500 and Nasdaq Composite were rising 15.3 percent and 19.5 percent , respectively , to record highs , and even the old fogey Dow Industrials crept up 4.3 percent , gaming stocks tanked .
In part , that was the result of a bifurcated ( and not necessarily healthy ) market in which a handful of giant tech stocks raced higher . The overall market , based on advancers versus decliners , was less exuberant . And small caps , represented by the Russell 2000 , which may be the best comparison for gaming , lay flat .
But even by the Russell ’ s uninspiring performance , gamers punked out . The Big Four Las Vegas-headquartered casino operators , for example , averaged a 6.4 percent decline during the first six months of the year , with MGM the lone nonloser in finishing essentially even .
Regional casino operators fell 7.9 percent with just the two companies that still look like growth companies rising — Churchill Downs at 4.3 percent and Red Rock Resorts at 3.8 percent . Losses among their kin were scary in some cases , such as Penn Entertainment plunging 25 percent and Golden Entertainment 21.9 percent .
Suppliers were weak , too , with the largest of U . S . -listed companies down an average of 7.2 percent .
Aussie . Aussie . Aussie . Oi . Oi . Oi . But not all was lost among suppliers . Australian-listed Aristocrat advanced 18 percent , hitting record high after record high . Light & Wonder was even better , up a rousing 28 percent , and although a U . S . company , it ’ s almost as Aussie as Aristocrat , with many of its leaders being Aristocrat alumni and LNW now dual-listing Down Under .
But enough of that good news . Back to the gloom . Remember affiliates ? They are the media companies that exist to drive their subscribers to online gaming operators . Thus , they were to be double winners — growing along with the online sports and e-casino industry , and benefiting as operators tired of losing huge sums on customer acquisition turned to them as inexpensive , targeted promotion vehicles . Well , Gambling . com dropped 16 percent in the first half , Better Collective 11 percent and once highly touted Catena Media crashed 59 percent .
Talking about the online operators , several of them have retreated back to Europe and Australia . But the three U . S . -listed operators actually had a strong first half . The duopoly of DraftKings and Flutter ( primary owner of FanDuel ) rose 10 percent and 5 percent , respectively . And Rush Street Interactive soared 117 percent . But before you hit the ceiling jumping for joy , remember that three years ago , $ 38 DraftKings cleared $ 74 a share and $ 8.70 Rush Street pierced $ 20 .
There ’ s plenty of opportunity to buy companies at prices higher than the stock market is giving them and still make a profit .
And while focused on U . S . stocks , it is interesting to note that the six Macau casino operators fell an average of 6.6 percent , though market-share gaining MGM China jumped 22 percent .
The malaise felt by gaming investors is understandable , given such selloffs . Few companies have meaningful growth strategies . The post-Covid costcutting era has ended . Slow capital markets don ’ t give much hope for mergers and acquisitions . And investors who haven ’ t given gaming stocks the same valuations as companies in other leisure and hospitality industries have no reason to start now .
The most prominent current example of this situation is Penn Entertainment . Its stock has been driven down by investors tired of its multibilliondollar , so far money-losing investments in sports betting and iCasino to the point where the stock of the whole company is worth well less than just its profitable brick-and-mortar operations . It is a value play crying out for action . But , so far , rumors of a buyout price of $ 25 a share would still leave it undervalued , and most likely a deal undone at that price . So , what are the solutions ? On the tech side , rapidly developing artificial intelligence might offer productivity enhancements in items such as property management , game development and promotions . We ’ ll look for companies that use technology to reduce costs , and that also use it to enhance customer experience .
Selective growth opportunities still exist , as Red Rock Resorts demonstrates in riding the Las Vegas Valley population boom and Churchill Downs demonstrates in continuing to expand its Kentucky Derby franchise and in leading the way in historical horse racing growth .
Best-of-class remains a path for growth . Wynn Resorts is proving that along the Las Vegas Strip , as is Red Rock in the Las Vegas locals market .
Another possible catalyst for coming out of the doldrums is if private equity steps in and makes some acquisitions . There ’ s plenty of opportunity to buy companies at prices higher than the stock market is giving them and still make a profit . Go back to PENN . Someone paying $ 30 a share would be paying a hefty enough premium to current shareholders to get a deal done and still be able to return the company public in a few years for double or more the purchase price .
A few deals like that and the rising tide of higher valuations might lift all boats and get gaming stocks back to prices that better reflect their value .
In the meantime , investors will have to look for selective growers , best of breed with room to grow organically and companies willing to commit to serious share repurchase programs .
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
12 Global Gaming Business AUGUST 2024