One no longer needs eyeglasses to see profitability in igaming or online sports betting according to Truist Securities analyst Barry Jonas who published a wide-ranging report today. That said, gaming-focused REITs “are still the safest neighborhood in Gamingland,” Jonas opined, adding that he had come away from last week’s Global Gaming Expo liking the tech sector as well.
In the body of his investor note, Jonas observed that DraftKings, Caesars Sportsbook, and BetMGM had all posted their first positive returns on investment in the second quarter. “With customer acquisition around football-season’s kickoff and [online sports betting’s] launch in Kentucky (in late Sept.), we see Q3 as another quarter of losses before significant profit in Q4.”
The analyst continued that ESPN Bet, Fanatics, bet365, and a revamped BallyBet would all try to dent market leaders DraftKings and FanDuel. Still, there were early signs that the fourth quarter of this year “could be robust, as customer retention and wagering trends are showing strength.”
Jonas led with a few economic observations. “While we’ve been looking for real consumer stress to no avail for 2+ years, the question now is whether it finally starts to show,” he mused, citing high interest rates and gasoline prices and resumed student-loan payments as possible stressors.
Amongst gaming stocks, the analyst perceived the most upside in DraftKings (“one of the best growth stories in gaming”), along with Caesars Entertainment, as he foretold record-level fourth-quarter earnings. Manufacturers on his hit parade were International Game Technology and Light & Wonder, both hailed for positive trends.
Drilling more deeply into individual companies, Jonas found the following.
Churchill Downs: “[O]ne of the strongest growth stories in gaming.” Jonas lauded its “deep pipeline” of projects in both the historical-horse-racing sphere and in Class III casinos. While “unfortunate horse fatalities” in and around the Kentucky Derby were dismissed as “noise,” the voters are still out on Churchill Downs’s Richmond, Virginia, casino proposal. Jonas shaved $7 off his price target for the stock (to $148), based on a more conservative timeline for property rollouts and indications that gambling “has proven to be more impacted than we anticipated.”
Penn Entertainment: This price target was lowered to $25 from $30. Despite that, Jonas was pleased with Penn’s replacement of its two northern-Illinois riverboats, as well as capital-intensive improvements in Columbus, Ohio, and at Las Vegas’s M Resort. Penn’s ejection of Barstool Sports and new partnership with ESPN Bet left Jonas “with more questions than answers,” due in part to “a tremendous amount of execution risk.” But there might be a silver lining for investors: “With sentiment fairly negative on PENN, we think successful execution could drive meaningful upside to the shares — though it’s too soon to say.”
Boyd Gaming: “We continue to like” this stock, thanks to low leverage, a five percent stake in FanDuel, and self-owned real estate. Jonas saw positive impact on Vegas-locals play from capital investments at Boyd’s downtown properties. He also believed investors would be pleased with Boyd’s ongoing, $100 million-per-quarter, stock buybacks.
Monarch Casino Resorts: Although powered by Monarch Black Rock in Colorado, this is a company that has nevertheless underperformed, the analyst wrote. He attributed this to “the later innings of a growth phase” and investor impatience for additions to a modest portfolio. He dropped his price target from $95 to $90.
Station Casinos: Modest but measurable locals growth in Las Vegas portends well for Station, reported Jonas. He predicted that Durango Resort would initially cannibalize other company properties, notably Red Rock Resort, “before demand is backfilled over time.” Accordingly, he revised his price target from $50 to $46.
Bally’s Corp.: “[T]he weakest stock in our portfolio,” Bally’s has slid from $72 a share to below $10. Jonas thinks this “valuation is simply too cheap with a long list of catalysts.” These would be the new Bally’s Casino in Chicago, development options on the Tropicana Las Vegas, as well as newly legal igaming in Rhode Island. Detracting from the stock have been high leverage, an evolving North American interactive strategy, and “a string of leadership changes.”
On the interactive side, Bally’s “continues to make progress … while continuing to evaluate the divestiture of non-core assets.” Five percent market share in icasino was achieved in New Jersey last August, with hopes of as much as eight percent. Other catalysts were a recent Pennsylvania launch (1.5 percent market share) and a “meaningful opportunity” in Rhode Island.
DraftKings: Jonas predicted this would be a long-term winner in the online-sports-betting space. As for “recent stock malaise,” that was attributed to “a function of wider market dynamics and uncertainty around ESPN Bet and other entrants/improvers.”
Caesars Entertainment: It “seems to have some very positive momentum on the path to $550M+ annual” cash flow, wrote Jonas, citing the debut of the Liberty platform in Nevada and the Caesars Palace igaming app. Priorities in sports betting were described as higher hold percentages (up to nine or 10 percent), more same-game parlays, and more high-margin action.
BetMGM: “… is continuing to show steady strength.” Icasino revenues are a particular source of puissance. Jonas felt that “little credit is given as investors continue to clamor for a resolution to the 50/50 [joint venture] structure with Entain.” He believed “a depressed MGM valuation and higher interest rates could hinder any near-term solution.” However, the company hopes for European success with LeoVegas, which recently launched in the United Kingdom.
