Is the Gaming Sell-Off a Reason to Panic?

Gaming stocks have been hammered over the past month along with other high-growth parts of the market. But while the market was selling off, gaming companies continued to rake in money, particularly in Macau.

Macau's gaming revenue was up 40.3% in February and 13.1% in March, showing no signs of slowing down in 2014. So, is now the time to panic or double down on gaming stocks?

LVS Total Return Price Chart

LVS Total Return Price data by YCharts.

Growth is there but value isn't
Gaming stocks fall into a similar category with tech stocks in today's market. Over the past year or two the stocks have risen in part because of growing multiples, which have combined with growing revenue and profits to give investors outstanding returns.

You can see below that Melco Crown (NASDAQ: MPEL  ) has seen the sharpest multiple rise but Las Vegas Sands (NYSE: LVS  ) and Wynn Resorts (NASDAQ: WYNN  ) are up significantly from July 2012 lows.

LVS EV to EBITDA (TTM) Chart

LVS EV to EBITDA (TTM) data by YCharts.

While I'd like to be buying at a lower enterprise value/EBITDA multiple, I don't think there's reason to panic.

First, all three of these companies have new Macau resorts coming on line in the next two years, and Melco Crown has a resort in the Philippines as well. That will provide growth avenues for each company as they expand available tables (assuming Melco Crown gets tables at Studio City).

Macau is also still growing at a rapid rate of between 10% and 20% annually, which will likely continue unless the Chinese economy tanks. The advantage for these operators is that additional gaming revenue will be leveraged to the bottom line because they've more than covered operating and depreciation costs. So, EBITDA and net income will rise faster than revenue in 2014 and beyond.

Keep an eye on the growth sell-off
Gaming stocks aren't the only stocks that are selling off, and it's more of a broad sell-off than any critical flaw with these companies. Multiples are still high, so if you're looking for value it may be worth waiting to jump in, but as a shareholder of Wynn I'm not panicking. There are simply too many positives for gaming stocks right now to overlook the long-term opportunity.

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