Internet had a huge influence on our lives and changed the way we do many things from booking hotels to obtaining college degrees. With the evolution of technology, the Internet is capturing more and more aspects of our lives, including gambling. Of course virtual operations will do all they can to convince you that the online gaming format is better, but is this a valid argument? The popularity of online casinos is growing and is expected to top $40 billion in the next two years. Even though it represents just a fraction of the total value of the global gambling industry and online gambling is highly regulated and banned in many states, at some point the online gambling revenue might top the revenue obtained by the traditional brick-and-mortar casinos.
Similar to the retail space that is conquered by e-commerce companies that have advantages such as low overhead costs, lower prices and more inventory, online gambling can also have some points that will appeal to customers. Just a couple of years ago, Atlantic City saw the closure of 12 casinos and even though the remaining venues seem to be getting back on track, they still show lower revenue at table games, which is offset by higher online gambling revenue and slot machine revenue. With this in mind, let’s take a closer look at some casino operators and see how their stocks may be affected by the advancement of online gambling.
We are going to focus on five stocks, based on their popularity among the hedge funds and other institutional investors, whose 13Fs we analyze as part of our small-cap strategy. Smart money investors usually take into account a lot of factors while picking a stock to buy and invest for the long run, which is why looking and how they collectively view a stock is a good way to start identifying profitable investments.
Let’s start with MGM Resorts International (NYSE:MGM), whose stock is 48% down for the last decade, although the main reason for the decline is the financial crisis, rather than the progress in online gambling. The stock has surged by 72% over the last five years and 49 investors from our database hold shares of the company, including billionaire Leon Cooperman‘s Omega Advisors, Daniel Och’s OZ Management and Parag Vora’s HG Vora Capital Management. MGM Resorts International (NYSE:MGM) acknowledges the growth of the online gambling, although it currently doesn’t see it as a threat as the company said in its last 10-K that its competition with Internet-based casinos is to a ‘lesser extent’. However, MGM Resorts doesn’t rely on brick-and-mortar casinos just for gambling revenue, but for its hospitality revenue, which is why online gambling might reduce MGM Resorts International (NYSE:MGM)’s customer visitation and spend, as the company warned its shareholders in its 10-K. However, in most of its locations the threat is mostly theoretical, because online gambling still requires many legislative changes to pose a threat to established casinos in popular geographic locations.
Then there is Boyd Gaming Corporation (NYSE:BYD), which decided to ‘steer into the skid’ and diversify its operations to include online gambling as well. In 2013, Boyd, Borgata and Digital Entertainment PLC entered into an agreement, under the terms of which Digital Entertainment helped Borgata to launch online gambling services in New Jersey under its own brand. Last year, Borgata held 25% of online gaming market in New Jersey. In addition, Boyd Gaming said in its 10-K that its partnership with Digital Entertainment allows it to increase its online presence in other states where online gaming may be legalized. Boyd Gaming Corporation (NYSE:BYD)’s stock has also not fully recovered from the financial crisis, its stock trading down by 57% since 2016, although for the last five years it has been gaining ground, surging by 134%. Among the funds we track, 32 – reported long positions in Boyd Gaming Corporation (NYSE:BYD), including Paul Reeder and Edward Shapiro’s PAR Capital Management and Rehan Jaffer’s H Partners Management.
Wynn Resorts, Limited (NASDAQ:WYNN)‘s stock has been struggling, although the main reason of its 27% drop in the last five years comes mainly on the back of its exposure to the struggling Macau business. The company is currently expanding in the region and plans to open a new resort there, which will give it a revenue boost if the region recovers, since it will add one to just two resorts Wynn Resorts, Limited (NASDAQ:WYNN) currently operates in Macau and Las Vegas. Overall, 30 funds from our database were long Wynn Resorts, Limited (NASDAQ:WYNN) at the end of 2015, with Mason Hawkins’ Southeastern Asset Management ranking at the top with 12.58 million shares.
In Penn National Gaming, Inc (NASDAQ:PENN), 29 funds among those we track reported long positions heading into 2016, including Dmitry Balyasny’s Balyasny Asset Management and Israel Englander’s Millennium Management. Penn National Gaming has also adopted some initiatives to take advantage of the growth of online gaming and launched a subsidiary, Penn Interactive Ventures, which however is currently doesn’t have any impact on its operations. The company sees potential in the online casino space and sees it as an evolving and competitive market, although its progress in this segment is dependent on many factors, including legalization of online gaming in more US states and changes in public preferences and demographics, as Penn National Gaming, Inc (NASDAQ:PENN) said in its 10-K report. Penn National Gaming, Inc (NASDAQ:PENN)’s stock has gained over 80% during the last decade.
Pinnacle Entertainment, Inc (NASDAQ:PNK)‘s stock is up by 30% for the last 10 years and it saw 26 funds among those tracked by Insider Monkey hold shares at the end of the last year. HG Vora, and David Shaw’s D. E. Shaw & Co. ranked among the top shareholders of Pinnacle Entertainment, Inc (NASDAQ:PNK) heading into 2016. Pinnacle Entertainment also considers that online gaming might represent a threat for its operations. In its last 10-K report, Pinnacle Entertainment said: “[…] internet wagering services are likely to expand in future years and become more accessible to domestic gamblers as a result of recently announced U.S. Department of Justice positions related to the application of federal laws to intrastate internet gaming and initiatives in some states to consider legislation to legalize intrastate internet wagering.”
The bottom line is that even though online casinos currently don’t pose a threat to brick-and-mortar gaming venues, companies operating in the casino space are becoming more and more aware of the technology and while some are already expanding their presence in the mobile space, others are likely to follow suit. However, casino operators also own significant real estate assets in premium locations, which will be appealing for their investors and they offer customer a unique experience, which is unlikely to be replaced by technology. This is why stocks of casino operators are unlikely to tank on the back of online gambling evolution, at least in the next couple of decades.