Shares of companies that supply casinos and lotteries with products like slot machines and technology services dropped like a rock in early trading Thursday, only to recover most of their losses in the afternoon. Shares of IGT (IGT -3.33%) dropped as much as 11.3% in the first half-hour of the day, were trading in the black by noon, were down just 0.8% this afternoon. The stock of Scientific Games (LNW -0.38%) fell 12.6% early, but later was down just 0.75%. And Everi Holdings (EVRI -0.49%) dropped 10.1% early and recovered to a loss of 1.5% by the afternoon.
The big drop in shares this morning coincided with the market falling nearly 2% after unemployment data was released. The Bureau of Labor Statistics said that 2.98 million people filed for unemployment last week, pushing the new jobless claims number to 36 million since shutdowns related to COVID-19 began. Not surprisingly, volatile stocks like those related to the casino industry magnified the losses.
What's concerning for casino companies is that the more unemployed people there are, the fewer potential customers there will be for highly discretionary consumer spending like gambling. And bigger unemployment numbers may indicate a deeper economic hole than the market is currently expecting.
With stocks overall recovering later in the day, casino stocks bounced back, too. But the long-term concerns for the industry haven't changed, and the economy is far from a healthy place.
I wouldn't read too much into today's wild movements; this is the volatility that gambling industry investors should expect in uncertain times like these. What I would keep an eye on is gambling revenue as countries and states start to loosen economic restrictions. Asia will likely be the first to see gambling pick up, with Macao and Singapore expecting an uptick in activity throughout the summer and fall. But the U.S. casino market may be in for a long, slow recovery given the high rate of COVID-19 infections compared with Asian countries.
For casino and lottery suppliers, any recovery may take even longer than for casinos. Not only are they reliant on gambling volume to drive revenue, but casinos also need to make investments in new equipment. If people don't return to casinos in the U.S. and abroad at the same pace as before the current crisis, we could see properties cut any costs they can, which means holding off on new equipment. And all three suppliers have high debt loads to worry about after years of consolidation in the industry. That could be a burden that holds these stocks back more than investors are currently pricing into shares.