Online Gambling May Not Be the Best Bet

With very slow starts in the first states to legalize Web-based gambling, some industry players may be behind the wrong horse. In the gambling world, brick-and-mortar remains king.

Apr 7, 2014 at 10:49AM

The gaming world has been increasingly focused on Web-based gambling as a means for growth, especially in the relatively mature U.S. market. Major players such as Wynn Resorts (NASDAQ:WYNN) and Caesars Entertainment (NASDAQ:CZR) have invested big in the segment and made lucrative partnerships, all while fighting tooth and nail for favorable state regulations. With all of this effort in mind, is online gambling all it's cracked up to be? Some areas are showing more promise than others, but Nevada, the capital of U.S. gaming, has shown very mild interest in the platform since its introduction in the last few months. Are gaming companies betting on the wrong horse?

Better than bingo
In a recent monthly Nevada gaming report, gross winnings for online gambling (the first period it has been reported since the state legalized Web-based gaming) were second to last, beating only bingo. In New Jersey, Delaware, and Pennsylvania, where online gambling has been legal since late 2013, the data is similar. In February, New Jersey's growth actually slowed, sequentially.

Considering the multiyear hype surrounding the potential for online gaming, this is a somewhat surprising fact, though it is far from a trend at this point. Bloomberg reported that New Jersey's state treasurer had originally estimated first-year incremental revenue from online gambling at $1.2 billion. Since then, the estimate has gone drastically down to just $34 million.

The causes for the slow take to Web-based gambling vary -- from technical problems on the websites to an increasing demand for physical locations. Payments have also been an issue, as some federal laws make it difficult for major banks to accept gambling-related deposits. Using credit cards remains difficult, too.

Bad bet?
Caesars has been one of the earliest to the Web-based gaming trough. The company has partnered with tech firms and professional sports organizations, as well as lobbied state governments incessantly to establish itself as the leader in the space. While Wynn and Las Vegas Sands are sourcing the vast majority of growth from the cash-cow regions of Macau and other parts of Southeast Asia, Caesars has not been well represented.

The stock reflects it, too. Caesars has traded up 15% in two years. In the same time, Wynn and Las Vegas Sands have booked 70% and 33% gains, respectively.

Regardless, most of the major gaming players are affected by the lackluster start to online gaming. They have all lobbied the government, both federal and state, for years, and spent millions in the process. Investors in Wynn and Las Vegas Sands likely won't feel too much pain, considering the amazing growth coming out of Asia, but Caesars could be a different story.

The online gambling space is still a new one, and the trends could improve with better execution and faster rollout across the country. At the moment, though, brick-and-mortar gambling appears to be the better bet.

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Michael Lewis has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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