Gambling Stocks on a Slump - Here’s Why These Stocks Are Losing Value

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A few months ago, sports betting and gambling stocks are top picks among investors and speculators. Among these stocks, Draftkings (NASDAQ: DKING), GAN Limited (NASDAQ: GAN) and MGM Resorts International (NYSE: MGM) lead the charge. What powered the growth of these stocks is the increasing popularity of online sports betting and fast payout casinos. It’s also being supported by a friendly industry where more states are now legalizing sports betting and online gambling. Online casinos and sports betting are growing in 2020 and the numbers are staggering. Specifically, betting in the United States increased to $2.19 bn in September from just $1.85 bn. It’s projected to reach more than $3 bn in bets monthly and can rival the numbers of physical casinos.

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This positive development has rubbed off on gambling stocks such as DKING and MGM. Fast-forward to 2021 and we see a souring relationship between investors and these stocks. The euphoria is gone and there’s a sell-off of these online gambling stocks which push its prices down. So what happened to these stocks and what can we learn from this?

Fast Payout Casinos are Back in Action

The pandemic pushed many businesses to close or at least suspend their operations. Some of the well-known stores and brands that folded under the pressure of the pandemic are Ascena Retail which faced more than a billion in debt, the restaurant chain owned by CEC Entertainment, and GNC, a health food store. The closure extended to the fast payout casinos that normally serve poker players and slot enthusiasts. This is primarily felt in the Las Vegas strip, the center of gambling activities in the United States, and in other gambling destinations like Macau. With many physical casinos closing, players have no choice but to play online thus boosting many up-and-coming gambling stocks.

But more than a year into the pandemic, the tables have turned and physical casinos are back in action. Many state governments are now allowing partial reopening of these fast payout casinos provided that the operators follow the minimum health and safety protocols. With these developments, many casino players are back to physical casinos. This means that these establishments are eating up on the market share of online fast payout casinos which hurt their profitability and value in the market. And since many of these are fast payout casinos that accept multiple payment options, this migration of players will continue and affect the online casinos’ bottom line.

Online Betting and Gambling are Not Yet Profitable

There is also an ongoing market correction for these gambling stocks. One reason for this is the growing realization that online gambling sites are not yet profitable and it may take years for it to match the revenues of physical casinos with fast payouts. Although going virtual is convenient for all parties, reaching new players can be very expensive.

One can take a look at the DraftKings experience to realize the cost of running an online gambling site. As the largest publicly traded gambling stock in the US, the company posted accelerated revenues during the pandemic. However, its sales and administrative costs far exceed their revenues which bleed their bottom line. Sure, the company may still turn the tables as it reaches more players and acquisition costs fall. But this may take years and we know that most retail investors are impatient and this pessimism drags the price of these stocks down.

Trending Stocks Take the Spotlight

In the stock market, when some stocks rise, some will fall in price. Months into the pandemic, the market welcomed an interesting set of investors- passionate retail investors who are active in social media and forums. Also called retail investing, this trend exploded in 2020 and produced several high-flying stocks like AMC and GameStop. Most of the investors were young with minimal experience and they often share news, tips, and recommendations on Reddit, Discord, and Twitter. Since these stocks exploded in popularity, the money flows out of the former favorite stocks and into these trendy stocks as a way to ride the hype. This can be considered as one reason why gambling stocks of casinos with fast payouts are lagging behind their counterparts.

Should You Skip or Wait?

Although most of these gambling stocks have dropped in price, it’s important to note that their values are still better compared to the pre-pandemic levels. What we are seeing are market corrections and it’s important that investors should take a ‘wait and see’ attitude. Gambling companies with an online presence also boast other revenue sources that they can use to finance their online gambling projects. If the free-fall of stock prices continues, there is a possibility that some of these operators may buy these gambling stocks and integrate these into their operations. For example, Las Vegas Sands run many fast payout casinos showered interest in acquiring online gambling stocks and they may act fast if the price fall continues. As such, it’s a waiting game for experienced investors and it’s dangerous to bet against these stocks right now.

 

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