Big Debate: After a difficult 2021 for gambling stocks, should we expect a rebound this year?

Julian Buhagiar, co-founder, RB Capital

I’m not the biggest fan of gambling stocks. In sentiment-driven markets such as the ones we find ourselves in in early 2022, when a company is not owned by private shareholders, even the most technically proficient and efficiently run operators are not immune to flash trading, virtue-signalling, and environmental, social and governance.

That said, there are some clear technical and fundamental indicators that suggest the bottom has been called, at least for the next 12 months. Despite the fact that most gambling stocks trade at a higher P/E ratio (typically 60-100) than their FAANG (big tech) counterparts (20-50), they have been oversold in the latter part of 2021 and are ripe with potential as the US states look to gradually open this year.

Just witness what the opening weekend in New York has done for gambling stocks. Even large, depressed assets such as Penn National Gaming stand to gain from a wider rebound in sentiment once buyer momentum is restarted later in the year.

Moreover, this is going to be a year that will be flush with M&A activity, particularly as the media conglomerates look to consolidate their hold in the burgeoning US market. With that will come the inevitable FOMO, which will contribute to the share price rebound.

The wider concern over US gaming’s path to profitability is not going away, and reality will bite later next year once the actual impact of the high-cost acquisition of higher-churn customers (against higher state taxes) becomes omnipresent. However, there have been many industries that still ride on negative EBIT amid rising share prices, and red bottoms are unlikely to have a detrimental effect on the prices of the shares they belong to (see Spotify, Zynga et al), at least for the remainder of this year.

So, make hay while the sun shines in 2022, but hold on to your seats (read: long defence and pharma stocks) as it’s going to be quite a ride…

Paul Leyland, partner, Regulus Partners

Gambling stocks took a battering in 2021 for three simple reasons. First, the continuation of Covid-19 policy disruption limited land-based recovery but created tough digital comps. Second, US online opportunities were driving astronomical valuations which made the sector overall, and especially US-exposed stocks, very vulnerable to ‘correction’. And lastly, investors got wary about a high-risk growth story without a visible route to cash generation.

Covid-19 policy disruption is hopefully going to unwind this year as effective vaccinations are rolled out globally. That is obviously good news for public health, footfall and retail opening times, but is it good for gambling stocks overall? We don’t think so.

The Covid-19 policy unwind causes four big problems for gambling stocks. The first is inflation, which is especially brutal to land-based businesses which still comprise an important part of listed gambling cashflow. The second is fiscal pressure – every sector is likely to be squeezed to foot the bill and gambling is a dangerously easy target. The third is a consumer shift back from digital to retail; this won’t be anywhere close to total but there will be some ‘normalisation’ – swapping high valuation multiple, high margin revenue for much lower multiple revenue. Finally, the enormous global shift to digital entertainment, combined with an empowered public health lobby, is likely to put online gambling in the regulatory crosshairs.

The problem with the US correction is that it was deserved. Sky-high TAMs based on extrapolated GGR bore no relationship to sustainable profitability and investors are now at risk of unsustainable revenue being generated at their expense. The bottom of the market will only be called when a solution to this problem is found. As an old broker once said – a stock that has fallen by 90% is often one which fell 80%, had investors pile in because it looked cheap, and then halved…