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Stock Strategist

3 Gaming Companies to Bet On

Given their size, reach, and resources, these companies could dominate the sports-betting industry, which is projected to witness explosive growth.

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As lockdown restrictions ease and businesses reopen, professional sporting activities are starting to return to arenas. This bodes well for the sports-betting industry, which was growing exponentially until the novel coronavirus threw a wrench in the works.

Legal in the United States since 2018, it's difficult to determine the size of the industry, but its growth prospects are undeniable. Estimates of the size of the sports wagering market vary significantly. Independent research firm Gambling Compliance forecasts the U.S. betting market to reach anywhere between $6 billion and $8 billion by 2024. The market, according to Morgan Stanley, could be worth $12 billion annually by 2025.

These gaming stocks are quickly moving to position their businesses to benefit from the burgeoning sports-betting market. Given their size, reach, and resources, these companies could dominate the sports-betting industry, which is projected to witness explosive growth on the back of legalization, growth in popularity of international sports events, and advances in online gaming technology.

MGM Resorts International (MGM)
  Current yield: 0.05%
  Forward P/E: -
  Price: $21.16
  Fair value: $30.00
  Value: 30% discount
  Moat: None
  Moat Trend: Stable
  Star rating: ****
Data as of Oct. 15, 2020

The largest resort operator on the Vegas Strip, MGM Resorts boasts 35,000 guest rooms and suites. The Strip accounted for nearly half of MGM’s total EBITDAR in 2019. The company also operates the 56%-owned MGM Macau casinos with a new property that opened on the Cotai Strip in early 2018. A property in Japan is expected to open in 2026.

More recently, MGM has been making a big push into the money-spinning sports-betting arena. As part of that move, the company's sports-betting platform, betMGM, recently tied up with professional American football team The Detroit Lions and followed it up with another deal with the Las Vegas Raiders as their official sports-betting partner.

“In the U.S., MGM’s 21 casinos are positioned to benefit from an estimated $6.2 billion sports-betting market by 2024, generating about 4% of the company's total revenue that year,” says a Morningstar equity report, adding the operators could benefit meaningfully as more states move to legalize betting over the next four years.

All of MGM's 21 domestic properties are expected to participate in this opportunity, says Morningstar equity analyst Dan Wasiolek, who pegs the stock’s fair value at $30. He projects MGM's domestic revenue to drop 57% in 2020, followed by an 84% increase in 2021. “Over the next 10 years we forecast a 6% to 7% annual lift to MGM's domestic revenue, aided by its T-Mobile arena, professional sports, U.S. sports wagering, and recent renovations,” says Wasiolek.

Caesars Entertainment (CZR)
  Current yield: -
  Forward P/E: -
  Price: $55.60
  Fair value: $56.00
  Value: Fairly valued
  Moat: None
  Moat Trend: -
  Star rating: ***
Data as of Oct 15, 2020

Caesars Entertainment owns 53 domestic gaming properties across Las Vegas (45% of 2021 estimated EBITDAR) and regional (55%) markets. The firm also hosts 13 international properties. Caesars' U.S. presence roughly doubled with the July 2020 acquisition by Eldorado.

Caesars recently agreed to acquire British-based gambling group William Hill for $3.7 billion in a large bet on the fast-growing sports-betting market. Acquiring one of the world's leading betting and gambling companies could prove to be a fortuitous move for Caesars as it coincides with the acceleration of gaming legislation and growing adoption by consumers.

“Caesars offers investors attractive exposure to the U.S. sports-betting market, with its revenue in this industry expanding to nearly $900 million in 2024, or around 8% of total company sales,” says a Morningstar equity report, noting this is significantly larger than the $500 million to $600 million that rival MGM is expected to garner from the industry in 2024.

As a result of the acquisition of the legacy Caesars business by Eldorado, Caesars holds more than a 10% revenue share of the domestic casino gaming market. “The acquisition roughly doubled the company’s U.S. portfolio to 53 properties, while also lifting its loyalty membership over 60 million from 55 million prior,” says Wasiolek, who recently upped the stock’s fair value to $56 from $53, “to account for higher sports-betting revenue from the company's California property in 2023 and beyond."

Wynn Resorts (WYNN)
  Current yield: -
  Forward P/E: -
  Price: $72.00
  Fair value: $110.00
  Value: 35% discount
  Moat: Narrow
  Moat Trend: Stable
  Star rating: ****
Data as of Oct 15, 2020

Luxury casinos and resorts operator Wynn Resorts owns four megaresorts: Wynn Macau and Encore in Macau (China) and Wynn Las Vegas and Encore in Las Vegas (U.S.) The company also operates Cotai Palace in Macau and Encore Boston Harbor in Massachusetts and has various Vegas projects currently under development. Wynn generates 76% of EBITDA from Macau and 24% from Las Vegas.

The firm is going all in on the sports-betting market. It recently rolled out its digital sports-betting platform, Wynn Sports mobile app, muscling its way into the playground. The company plans to expand Wynn Sports' digital sports-betting offer to Colorado and Indiana in partnership with Scientific Games. More recently, Wynn tied up with GAN, an Internet gambling software supplier, allowing the latter to provide the platform for Wynn’s online sports-betting and casino gaming.

Longer term, though, the high-end iconic brand is well-positioned to participate in the attractive growth opportunity of Macau. “Although the COVID-19 outbreak is a headwind to near-term demand in Macau, we see solid long-term visitation and gaming growth for the gaming enclave, aided over the next several years as key infrastructure projects to alleviate Macau's congested traffic continue to come on line,” says Wasiolek, who recently lowered the stock’s fair value to $110 from $112, owing to lower near-term revenue.

Vikram Barhat does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.