The gambling market can be a lucrative business if you place your bets right. For most of the last decade, the best investments were in Macao's casinos, which were some of the most profitable in the world.
But the pandemic has changed the gambling business in ways that could be permanent. Online gambling is here to stay, Macao has yet to make a comeback, and Las Vegas is hotter than ever. But what stocks are great buys today? Let's dive into the casino industry.
MGM data by YCharts.
A booming recovery in U.S. gambling
Gambling in the U.S. has been stagnant since just before the Great Recession. But the industry seems to be snapping out of that, with the Las Vegas Strip reporting a record $7.1 billion in gambling revenue in 2021 despite a very slow start to the year. And the fourth quarter saw $2.1 billion in revenue, a pace of $8.4 billion annually.
There are a few trends that are helping casino companies like MGM Resorts International (MGM -1.24%) and Caesars Entertainment (CZR -1.14%), which control most of the Las Vegas Strip. One is that consumer spending is up after individuals and businesses were cooped up over the last two years, which is leading to a surge in gambling and overall spending in Las Vegas. We're seeing strong trends in regional casinos as well, but the Las Vegas Strip seems to be the biggest beneficiary.
I don't see an end to this trend, either. Businesses have only now started to plan conventions and in-person gatherings, so I would expect midweek spending to grow as corporate spending increases. The future looks bright for Las Vegas.
A light at the end of the tunnel for Macao?
A different story has unfolded in Macao, where Wynn Resorts (WYNN -0.47%), Melco Resorts & Entertainment (MLCO 0.64%) and Las Vegas Sands (LVS -0.63%) get a majority of their revenue. Gambling revenue in 2021 was just $13.4 billion, down from $36 billion in 2019.
There are some signs of improvement in the region as COVID-19 restrictions drop (sometimes only periodically), but there's uncertainty ahead. Macao has far more growth potential than Las Vegas from 2021 gambling levels, but might be many years from getting back to pre-COVID levels of activity.
Image source: Getty Images.
What investors should avoid
While the online gambling market is growing and very exciting for investors, I think it's still too risky for pure-play companies like DraftKings (DKNG 0.59%), Rush Street Interactive (RSI 0.34%), and many others. Companies are burning cash in an effort to build out technology and acquire customers, but they're not generating a sustainable return right now.
DKNG revenue (TTM). Data by YCharts. TTM = trailing 12 months.
We also don't know how sticky online gambling platforms will be. When another betting platform is a click away, where's the competitive advantage of one over another? Until these companies can prove they can make money, I would stay away.
With that said, for companies like MGM Resorts, Caesars, and even Penn National, online gambling growth can be funded with existing cash flows until the business matures, and they could ultimately be the industry's winners just by being able to outlast the competition.
The best bets in gambling stocks
We know that the U.S. gambling market is strong, and that's why I think MGM Resorts and Caesars Entertainment will be well positioned for the next few years. The advantage MGM has is one of the top market shares for online gambling with BetMGM, giving it optionality online without risking the business, and two casinos in Macao.
That's why MGM Resorts is my top gambling stock today. The odds are in its favor more than anyone else in the market.
