Caesars Entertainment (CZR 4.54%) has had a remarkable turnaround on the stock market, climbing 178% over the last three years and 432% over the past year after plunging at the beginning of the pandemic. Investors are betting on a recovery in consumer discretionary stocks, U.S. gambling, and continued growth in online gambling.
What may be getting lost in the mix is that Caesar isn't profitable and may not be for a while. Here's where the company, and the stock, might be five years from now.
A Las Vegas recovery
You can see below that Caesars' revenue has grown as it's integrated acquisitions, like the merger with Eldorado Resorts in 2020. But losses exploded last year as the pandemic took its toll on the business, and that will continue through at least the first half of 2020.
What investors have bet on is that demand for resorts and gambling will come back quickly. But there's no guarantee that will happen, and you can see above that Caesars wasn't particularly profitable even before the pandemic. And after the merger with Eldorado Resorts, the company's debt load has exploded -- and this is even after selling off most of its real estate, meaning there's little in real assets to fall back on in a downturn.
If Las Vegas -- and U.S. gambling in general -- doesn't return quickly, this level of debt could be a real problem, especially with competition heating up in online gambling.
The growth category in gambling
What's driven most gambling stocks over the past year has been growth in online gambling. DraftKings, MGM Resorts, Wynn Resorts, and many others are growing their presence in online gambling, which exploded during the pandemic.
To get in on the game, Caesars agreed to acquire William Hill for $3.7 billion. The company is its U.S. online gambling partner, and would bring a global presence to the company. The acquisition is being challenged by some large investors, however, and is now in an uncertain place.
Meanwhile, competitors are growing rapidly, with DraftKings expecting to generate nearly $1 billion in revenue this year and MGM Resorts expecting its online gambling business to double. Caesars could be a player if the William Hill deal closes, but that seems uncertain at best right now.
Where is Caesars headed?
Outside of closing the William Hill deal, there aren't a lot of growth opportunities for Caesars. The company's balance sheet is highly leveraged, and it would be hard to pay for any expansion. Caesars has also been shut out of Asia's lucrative Macao and Singapore markets, reducing upside in a recovery.
Caesars could have a large presence in online gambling with William Hill, but with the deal being challenged and competition getting stronger, I question whether there's much upside there. Online gambling operators have been reporting heavy losses as they spend to attract customers, and that could be a cash burn for a while. That's not what Caesars needs given the state of U.S. gambling and Caesars' own balance sheet.
Caesars has had a tumultuous history, with buyouts, bankruptcies, and lots of lawsuits over the past 20 years. I'm worried we're headed for more downside given the state of Caesars' business. But leverage can work the other way too, and fuel gains for a company if it can grow.
I don't see the next five years being as good for Caesars as investors are pricing in right now given the debt load and competition in online gambling. That's why I'll stay out of the stock and watch this company's future play out from afar.