3 Gaming Stocks to Buy Despite Industry Headwinds

·7 min read

The Zacks Gaming continues to be hurt by dismal visitations due to the pandemic. Although Macau is showing signs of recovery, revenues from the region are still well below the pre-pandemic level.

Reopening of the economy and roll out of vaccinations have been reinstating investor confidence. The industry players have been benefiting from robust demand for sports betting. Stocks like Boyd Gaming Corporation (BYD), Golden Entertainment, Inc. (GDEN) and Corsair Gaming, Inc. (CRSR) are likely to benefit from the aforementioned factors.

Industry Description

The Zacks Gaming industry includes companies, which primarily own and operate integrated casino, hotel, and entertainment resorts. Some of the industry players also deliver technology products and services across lotteries, electronic gaming machines, sports betting and interactive gaming.
Key Themes Shaping the Gaming Industry

Dismal Visitation Hurts: Pandemic-led restrictions in several parts of the world hurt the industry. Although casinos in Macau and Las Vegas are now open, the company is witnessing low visitation. Even though visitation in Macau, Las Vegas and Singapore has been increasing, it is still well below the pre-pandemic level. Moreover, high costs of operation and increasing debt are also hurting the industry. Following the completion of vaccination drive, visitation is likely to increase as casinos visitation should be safe then. Notably, companies have been focusing on levels of services and staffing with selective amenities, and enhanced safety and social distancing protocols in the gaming floor to welcome gamers.

Macau on Track to Recovery: Macau, the world’s largest gambling hub, is showing some signs of recovery after coronavirus-related disruptions. In April, the region’s Casino gross gaming revenue (GGR) increased sequentially for the third consecutive month but is still well below the pre-pandemic level. However, April’s gain was below the analysts’ expectations. According to Gaming Inspection and Coordination Bureau, gross gaming revenues were 8.4 billion patacas ($1.1 billion) in April, up 1.1% from the previous month. However, the metric is still 65% below April 2019 level. Visitor arrivals in Macau continue to improve and was at the highest level in April since the beginning of the pandemic.

Sports Betting Driving Growth: The legalization of sports betting in Delaware, Mississippi, New Jersey, New Mexico, West Virginia, Pennsylvania, Rhode Island, Montana, Indiana, Tennessee, Illinois and New Hampshire has been driving growth. Moreover, bettors are now able to place wagers through the digital platforms in Connecticut, Kentucky, Michigan, Massachusetts, Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona, Montana, Colorado and other states. Some of the popular igaming applications include DraftKings, Barstool, FanDuel, BetMGM, BetRivers, Fox Bet and BetMonarch. Markedly, the applications have been an important medium for gamers to connect, learn and inspire amid the stay-at-home restrictions. Major casino operator, Wynn Resorts, Limited (WYNN), is also expanding its presence. Wynn Resorts has made significant progress with respect to Wynn Interactive. The company also has access to nine U.S. gaming markets.. Meanwhile, since the outbreak of coronavirus, Boyd Gaming has been witnessing solid performance by the interactive gaming platform. Backed by its strategic partnership with FanDuel, the company is optimistic regarding its future in the iGaming industry.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Gaming industry is grouped within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #167, which places it in the bottom 34% of more than 254 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Dec 31, 2020, the industry’s earnings estimate for the current year has gone down 121.4%.

Despite the industry’s drab near-term prospects, we will present a few gaming stocks that one can add to portfolio given their strong fundamentals. But it’s worth taking a look at the industry’s shareholder return and current valuation first.

Industry Outperform Sector and S&P 500

The Zacks Gaming industry has lagged the broader Zacks Consumer Discretionary sector as well as the S&P 500 Index over the past year.

The industry has gained 64.1% over this period compared with the S&P 500 Index and the broader sector’s rally of 44.5% and 40%, respectively.

One-Year Price Performance

Gaming Industry’s Valuation

Since gaming companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. The industry currently has a forward 12-month EV/EBITDA ratio of 14.06 compared with the high of 16.78 in the past year and the median level of 15.01. The space is trading at discount compared to the market at large as the forward 12-month EV/EBITDA ratio for the S&P 500 is 17.2 and the median level is 16.79.

Over the past five years, the industry has traded as high as 14.06X and as low as 6.56X, with a median of 10.63X, as the chart below shows.

Enterprise Value-to EBITDA Ratio (Past 5 Years)

3 Zacks Gaming Stocks to Add to the Portfolio

Boyd Gaming: Headquartered in Las Vegas, NV, Boyd Gaming is a multi-jurisdictional gaming company. The company has been undertaking efforts to expand online betting offerings. One of the notable initiatives by the company has been regarding the legalization of sports gambling. In 2020, online gaming contributed more than $10 million in EBITDAR backed by FanDuel's mobile sports operation in Pennsylvania, Illinois, Indiana, Iowa and Mississippi. For 2021, the company expects EBITDAR to be more than $20 million.

Shares of this Zacks Rank #1 (Strong Buy) company have soared 93.5% in the past six months compared with the industry’s rally of 24%. Moreover, the company’s 2021 earnings are anticipated to increase 2,260%. In the past 30 days, earnings estimate for 2021 has been revised upward by 53.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: BYD

Golden Entertainment: The company together with its subsidiaries, owns and operates a diversified entertainment platform in the United States. It is gaining from increase in casinos and distributed gaming revenues. The company’s both Nevada and Montana distributed gaming operations witnessed robust growth in first-quarter 2021.

Shares of this Zacks Rank #2 (Buy) company have appreciated 121% in the past six months. Moreover, the company’s 2021 earnings are anticipated to improve 98.4%. In the past 30 days, loss estimate for 2021 has narrowed to 6 cents from 10 cents.

Price and Consensus: GDEN

Corsair Gaming: Headquartered in Fremont, CA, the company is a leading global developer and manufacturer of high-performance gear and technology for gamers, content creators as well as PC fanatics. The company is benefiting from robust performance of gamer and creator peripherals segment. In first-quarter 2021, the segment’s revenues increased 131.9% year over year. End demand for new products like K65 mini RGB keyboard and Elgato’s new accessories were robust in first quarter 2021.

Shares of this Zacks Rank #2 company have skyrocketed 130.1% in the past the past year. In the past seven days, earnings estimate for 2021 has witnessed upward revision of 2.6% to $1.55.

Price and Consensus: CRSR

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Wynn Resorts, Limited (WYNN) : Free Stock Analysis Report

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