The last decade has been a wild ride for Caesars Entertainment (CZR) and its shareholders. The company went public, made some very controversial transactions that left its largest operating unit bankrupt, and eventually merged with Eldorado Resorts to make one of the biggest gambling companies in the world.
Looking into our crystal ball, there are a few things we can see ahead for Caesars Entertainment. They may be a little less exciting than the last few years, but that might just be good news for investors.
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More of the same lately
Las Vegas and Caesars' regional casinos aren't likely to change much in the next five years. The company may trim a casino here or there, as it recently did with its sale of Belle of Baton Rouge casino on Dec. 1 for an undisclosed amount. Or it might add another. But there aren't many major acquisitions or development projects to be had right now. And coming out of the pandemic, highly leveraged companies like Caesars are going to be eager to focus on optimizing operations at existing resorts.
There also aren't any big development opportunities in the lucrative Asian market on the horizon. Macao and Singapore are at their limit for operators and Caesars has dropped out of the bidding for a Japanese casino. Those are the three most attractive markets in the region and Caesars has been shut out.
Online gambling could be big business
Where I do see an opportunity for growth is in online gambling. Caesars recently agreed to buy William Hill, the company's partner for online gambling in the U.S. William Hill will bring the software and iGaming expertise that Caesars didn't have in-house and this could be a big business long-term.
Between 2020 and 2027, Grand View Research expects the global online gambling market to grow at 11.5% annually and reach $127.3 billion by 2027. As a market leader, Caesars and William Hill could be a big player in that market. And I would expect over the next five years that Caesars will grow significantly in online gambling.
Why Caesars may not be worth the risk
There's certainly upside potential for physical casinos and online gambling over the next five years. But consider that Caesars doesn't have much to fall back on if tough times continue and may have squeezed all the value there is from the company's assets.
Caesars has sold most of its real estate to a real estate investment trust called VICI Properties (VICI -0.28%), so there's no more value to be extracted there. Likewise, there aren't billions of dollars of real estate weighing down the balance sheet like there was a decade ago.
Meanwhile, Caesars has $16.2 billion of debt on the balance sheet and reported just $463 million of adjusted EBITDA (a proxy for cash flow) in the third quarter of 2020. That's a high debt load for the cash flow and will require years of recovery from the pandemic to get back to any level of normal leverage. It's this issue that will keep me away from investing in Caesars' stock right now, despite the growth potential I see in gambling online.
