Vegas Ready To Recover From Pandemic: Now It's A Stock Picker's Game

Vegas Ready To Recover From Pandemic: Now It's A Stock Picker's Game

Singular Research: Staff

Summary

• Our gaming index imploded, but it then bounced back to the record-setting territory.
• Pent-up demand from many Americans has caused the gaming industry to see an uptick in customer demand.
• with 20 U.S. jurisdictions open to sports betting, aggressive marketing efforts are sure to continue converting customers to betting online.

(Airline traffic has steadily increased at McCarran International Airport in Las Vegas.)

It's only a five-mile stretch of Las Vegas Boulevard, but when the Strip shut down for the coronavirus pandemic in March 2020, it was as if the entire city had turned out the lights. The party's over.

Normally packed with tourists and traffic, Las Vegas' resort corridor - developed with $40 billion of casino infrastructure - looked more like the ghost towns that dot Nevada's historic mining landscape.

Our gaming index imploded, but it has since bounced back to record territory.

COVID-19 exacted a heavy toll on U.S. commercial gaming revenue, which plunged 31 percent in 2020, the first market contraction since 2014, according to the American Gaming Association.

The industry managed to survive by partially reopening casinos and getting a boost from legalized sports betting. Some gaming analysts are optimistic that the worm has turned.

Strip-exposed equities such as MGM Resorts (MGM) and Caesars Entertainment (CZR) have fully recovered and surpassed 52-week highs. MGM is up 18.9 percent from a year ago at $37.48 a share, and Caesars is more impressive, up 26.8 percent at $93.78, as of March 10.

Local favorites Boyd Gaming (BYD) and Red Rock Resorts (RRR) also have recovered, up 36 percent and 25.6 percent, respectively.

Las Vegas Sands (LVS) and Wynn Resorts (WYNN), which generate a considerable amount of revenue from Macau, have both undergone recent changes in leadership, and linger 30-40 percent below pre-pandemic highs.

Penn National (PENN), with its oversized investments in the spread of legalized sports gambling and iGaming, leads the pack, up nearly 200 percent from pre-pandemic highs.

Optimistic outlook

With the nationwide rollout of COVID-19 vaccinations and declining cases, deaths and hospitalization rates, the gaming industry is beginning to see an uptick in customer demand, the pent-up demand that many Americans have been waiting to unleash.

"The leisure customer will return to Las Vegas in a shorter time period than the business customer as we continue to emerge from the Great Shutdown," says Brendan Bussmann, government affairs director at Las Vegas-based Global Market Advisors.

"One of the keys to this, though, will be keeping good (airline) lift into the market because the leisure customer is still looking for deals and capacity is somewhat still constrained as airlines try to recoup losses."

Passenger traffic at McCarran International Airport, a key economic indicator for Las Vegas, dropped precipitously from 3.8 million in February 2020 to 152,470 in April 2020, then steadily climbed back to almost 2 million in October. January's count was 1.5 million.

Bill Miller, chief executive officer of AGA, feels upbeat about the second half of this year. "As vaccines roll out, people will be excited to travel, hungry for entertainment, and desperate to get out and have fun again. That's an environment where gaming will thrive."

Recovery of the gaming index confirms his view. Even as visitor growth flattened in Las Vegas before the pandemic, tourists were still interested in traveling to the city, though they may not have made the trip.

Betting app converts

While Las Vegas casinos took a major blow in 2020, online sports betting, Internet casino games and esports blossomed and show no signs of withering, even as casinos reopen around the country.

DraftKings (DKNG) and Fan Duel have flooded TV airwaves with app advertisements in states that legalized sports betting, and newcomers such as BetMGM, Skillz and Barstool are knocking on the door offering new products that enhance and advance the betting experience.

With some 20 U.S. jurisdictions open to sports betting, aggressive marketing efforts will continue to dominate the scene as operators compete for market share, Global Market's Bussmann said. Sports books across the country are converting customers to betting online.

"While these (apps) will win over the local market, there is still nothing that replaces the experience that Las Vegas offers during sporting events," he asserts. "The experience will never be lost even as sports betting spreads across the U.S."

Bally's Corp. (BALY) seeks a larger stake in the burgeoning esports segment, offering $100 million to acquire Allied Esports Entertainment, which follows last year's "skin" partnership with Esports Entertainment Group (GMBL).

Other than HyperX Esports Arena at Luxor hotel, esports has yet to gain traction in Las Vegas. Still, Bussmann sees the industry growing in terms of exposure, sponsorship, fan engagement and eventually wagering.

"While we have not seen as strong success as some would like in esports with casinos, we will eventually start to see a better blend as some of these esports are allowed to have wagers placed on them, depending on the jurisdiction," the gaming analyst said.

Stock Picking But With The Houses Edge

Esports has exploded in popularity over the past decade and is predicted to continue growing at an explosive growth partially from COVID-19 lockdown fears. Now here comes the houses edge, Esports Entertainment Group (GMBL) is the only eSports-focused wagering platform.

While Esports Entertainment Group has a huge focus on eSports, this isn't to say management is naïve. Management actually has a well thought-out business strategy to eventually branch into all areas of online gambling. From these factors and many others, we have a current price target of $20 a share.

If the houses edge wasn't good enough, what about being able to count cards?

Less metaphorically speaking here, another great beneficiary in the online gambling arena is Golden Nugget Online Gaming (GNOG). For starters, Golden Nugget Online Gaming is majority owned by Tilman Fertitta, one of the best jocks as a CEO one could ask for.

Not only does Golden Nugget Online Gaming benefit from having access to the Golden Nugget Casino database but also to the entire Landry's restaurant network. Over 600 restaurants around the United States will be miniature billboards for Golden Nugget Online Gaming.

One could argue these miniature billboards are not effective but simply put, Golden Nugget Online Gaming has almost 3x the average customer lifetime value as DraftKings. From these and other factors, we consider a fair value for Golden Nugget Online Gaming to be $24 a share.

Source: Singular Research Estimates

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