The casino and gambling industry had an even stranger year than most of the market in 2020, with some stocks tanking and others flying high. Traditional casino companies like Melco Resorts, Las Vegas Sands, and Wynn Resorts not only underperformed the market, they lost value last year. Meanwhile, stocks like Penn National Gaming and DraftKings skyrocketed to more than triple their value a year ago (or at the start of trading, in DraftKings' case) as investors bet they would be the industry's highest growth stocks

As we look to 2021, where should your bets be in the casino and gambling industry? Optionality is the name of the game next year. 

WYNN Chart

WYNN data by YCharts

The casino is back

I think 2021 will be defined by the return of the casino, not only in the U.S. but around the world. The hardest-hit gambling region was Macao, which shut down because of COVID-19 in February and never really recovered. Gambling revenue in Macao was down 79.3% for the year, and despite getting better as 2020 went on, the last three months generated less than one-third the revenue of a year ago. 

As casinos reopen, Las Vegas Sands, Wynn Resorts, and Melco Resorts have the most to gain in Macao. If gambling revenue is near what it was pre-COVID-19, I could see their stocks having a great year. 

In the U.S., MGM Resorts declined for the year, but overall the gambling market did relatively well. Casinos across the country were open for most of the year and despite some restrictions, gamblers were more than willing to place bets. In 2021, I would expect a continued recovery in these markets and potentially a windfall if vaccines are rolled out quickly and it's safe to hold large gatherings once again. 

But as much as the casino will be the story of the year, investors' fortunes could be won or lost off the casino floor. 

Person making bet on online sports app.

Image source: Getty Images.

Online gambling makes a splash

The hottest stocks in the sector last year were those with exposure to online gambling. DraftKings was an immediate success when it hit the market, and stocks like Everi Holdings and Gan Limited crushed the market's returns as well. Penn National was the surprise winner after acquiring a 36% stake in Barstool Sports for $163 million and agreeing to launch a sports betting app under the Barstool brand. That alone sent the stock skyrocketing, even though online gambling is only a few months into operation and is only a tiny portion of Penn's business. 

Since then, we've seen Rush Street Interactive and Golden Nugget Online Gaming hit the market to try to capture some of the buzz in online gambling. 

The market is certainly excited about online gambling, but we should put the opportunity into perspective. DraftKings, for example, reported just over $400 million in revenue over the past year and is losing money like crazy, even if we pulled out any costs to go public. So its $18.4 billion market cap looks lofty compared to traditional casino stocks that are generating billions in cash flow. 

DKNG Revenue (TTM) Chart

DKNG Revenue (TTM) data by YCharts

The future of these online gambling stocks really depends on how quickly state and federal lawmakers open up online sports betting and gambling in states. The market seems to think the transition will happen quickly, but we've been waiting for online poker to be legalized for more than a decade, so these companies may not see the kind of growth investors expect. 

The best bets in gambling today

I think there's going to be a big recovery in resort and (real-world) casino gambling in 2021, and that will not only help casino companies, but it'll take some of the growth away from online gambling. There's still a lot of growth for online sports betting and casinos, but along with a potential loss of momentum as real world casinos open, I think it will take longer than expected to get states to open online betting across the country. 

Given that backdrop, I think MGM Resorts is well positioned to have a great year as its two Macao resorts ramp back up, U.S. gambling recovers even more, and its online gambling app BetMGM gives it exposure to any growth in online gambling. It has exposure to all parts of the market, and that will hedge some of the risk that any specific segment faces. 

In the online space, I think the best play is actually the platform company Gan Limited. The company provides services like games, player verification, payment services, and financial reporting to online gambling license holders. It's a turnkey solution, and while shares aren't cheap at 19 times sales, this is an online gambling company that can grow anywhere in the world as online betting increases. That's why I think it will outperform other online gambling stocks in 2021. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.