Six Sports Betting and iGaming Stocks Trading at a Discount

iGaming and sports wagering businesses are booming, even as stubbornly high inflation has chipped away at consumer wallets. Despite this, 2024 has not been good for their stock prices.

The six US gambling company stocks covered by Morningstar are down 3.9% this year on a market-cap-weighted basis, well behind the 9.4% rise in the Morningstar Global Markets Index. The stocks have been driven lower by “angst over US sports and iGaming market competition and regulatory changes, as well as decelerating growth in US physical casinos after their strong demand recovery in 2021-23,” says Morningstar senior equity analyst Dan Wasiolek.

However, he thinks that since the stocks have been performing poorly while their business fundamentals are healthy, they trade at attractive prices. These are his two top picks:

• MGM Resorts International MGM
• Caesars Entertainment CZR

He believes investors are placing “too much weight on competitive pressures” with these stocks. Wasiolek highlights the other four wagering and gaming stocks as attractive discounted investments:

• Las Vegas Sands LVS
• Wynn Resorts WYNN
• DraftKings DKNG
• PENN Entertainment PENN

Outlook for Sports Betting and iGaming Stocks

A combination of new users, consumers spending more on these activities, and an increasing number of states permitting sports betting and iGaming has Wasiolek predicting strong sales growth. He anticipates industry revenue growth of 19% in 2024, 24% in 2025, 13% in 2026, and 27% in 2027. Over the past six quarters, US commercial gaming revenue growth has averaged 9.3%, with US GDP growth at just 2.1% over the same period.

“We think this speaks to the enduring demand consumers have for gambling activity, especially in the context of an expanding sports and iGaming betting landscape that is being legalized across more states and offering an increasing array of in-game and casino play offerings,” Wasiolek says.

Critical to the outlook is strength in visits to Las Vegas. “Las Vegas’ share of US commercial gaming revenue has held steady at around 20% the last six quarters, as the region adds sporting and entertainment events that attract visitation and wagering,” Wasiolek explains. “Meanwhile, sports and iGaming sales share has increased to high teens and low-double-digits in the first quarter 2024, respectively, versus mid-teens and high-single-digits at the end of 2022, aided by further state and user adoption.”

Betting growth is supported by strong sales in states where the industry is legalized and established, as well as consumers who participate and create demand. Sports betting is legal in 38 states and Washington, DC, which adds up to two-thirds of the country’s adult population. Kentucky, Vermont, and North Carolina introduced sports betting in the past year, and Rhode Island started iGaming in March.

Seven additional states will likely allow sports betting by 2027, expanding the reach to about 90% of the adult population. Texas is among the states with potential approval, and it represents 8%-9% of the country’s adult population, leading the industry’s revenue growth forecast to around $23 billion in 2027 from $11 billion in 2023, Wasiolek says.

It’s a similar story for iGaming. The number of states that allow it could increase to 10-15 from seven by 2025, “incentivized by the potential for incremental tax revenue from the activity,” Wasiolek explains. Such an expansion would increase the leading revenue estimate to over $12 billion in 2027 from $6 billion in 2023.

Even with these projections, apart from DraftKings, US gaming stocks have not performed well over the past year. This comes “as investors fear elevated financing costs would hinder the ability to invest in this capital-intensive industry,” Wasiolek says. Further, there are concerns about competition and regulatory changes in the US sports betting market, plus a decline in revenue growth in Las Vegas.

Top Picks

MGM Resorts International

• Fair Value Estimate: $55.00
• Morningstar Rating: 4 stars
• Economic Moat: None
• Morningstar Uncertainty Rating: High
• Forward Dividend Yield: None
• Price/Fair Value: 0.78

“We think investors are overly focused on recent revenue share loss in MGM’s digital segment. Although Penn’s recent ESPNBet launch in November 2023 and Fanatics’ acquisition of PointsBet in October 2023 have strengthened those companies’ position in the US sports betting market, we expect MGM’s share to stabilize in 2025, as it adds higher revenue-generating parlay wagering products. Also, the company continues to launch new online casino games in 2024, which should support its competitive position in the digital business.”

Caesars Entertainment

• Fair Value Estimate: $69.00
• Morningstar Rating: 5 stars
• Economic Moat: None
• Morningstar Uncertainty Rating: High
• Forward Dividend Yield: None
• Price/Fair Value: 0.55

“We believe elevated financing costs in the market have caused concerns over Caesars’ high debt levels; we forecast the company’s debt to adjusted EBITDA at 6.1 times in 2024. This has presented an opportunity to own shares of a company with a management team that has been solid stewards of capital, as cash flow returns from strategic tie-ups were used to quickly pay down debt versus shareholder returns via dividends or share repurchases, which we believe is prudent. As a result, we rate Caesars’ Capital Allocation as Exemplary.”

Las Vegas Sands

• Fair Value Estimate: $61.00
• Morningstar Rating: 4 stars
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: High
• Forward Dividend Yield: 1.87%
• Price/Fair Value: 0.7

“We expect Las Vegas Sands’ Macao resorts (54% of 2023 EBITDA) will continue to see strong revenue growth in 2024, in the wake of China lifting covid-19 restrictions in January 2023. We also think Las Vegas Sands and the Macao gaming enclave are well positioned for long-term growth. Not only does Sands hold a dominant mass and nongaming position on the attractive Cotai Strip in Macao, but we think it will reinvest back into its assets within the region, strengthening the brand locally.”

Wynn Resorts

• Fair Value Estimate: $122.00
• Morningstar Rating: 4 stars
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: High
• Forward Dividend Yield: 1.14%
• Price/Fair Value: 0.72

“Wynn’s Las Vegas 2020 revenue declined 54%, but sales in the region recovered to 92% of 2019 levels in 2021. Then in 2022 Las Vegas revenue grew 30% to reach 131% of 2019′s level. In 2023, group and international travel, along with a strong calendar of events in the fourth quarter, pushed Vegas sales up 14%. We see Las Vegas revenue averaging around 3% growth annually in 2024-33. We project that Las Vegas adjusted EBITDA margins will reach 37% in 2033, an increase from the 25.3% reported in 2019, driven by cost efficiency improvements and revenue scale. Finally, we expect Wynn’s Boston Encore property to see 3% average annual revenue growth during 2024-33.”

DraftKings

• Fair Value Estimate: $49.00
• Morningstar Rating: 4 stars
• Economic Moat: None
• Morningstar Uncertainty Rating: Very High
• Forward Dividend Yield: None
• Price/Fair Value: 0.76

“We see DraftKings’ share expanding and stabilizing in the high 20s, up from the low 20s in 2023, as it leverages its leading technology, product, and data offering. While PENN and FanDuel had the winning shares in Pennsylvania, We expect the recent drop in DraftKings’ share to prove temporary, given its strong user base and industry scale. Plus, DraftKings is still leading with revenue in Michigan, due to leading technology and user data.”

PENN Entertainment

• Fair Value Estimate: $22.00
• Morningstar Rating: 3 stars
• Economic Moat: None
• Morningstar Uncertainty Rating: Very High
• Forward Dividend Yield: None
• Price/Fair Value: 0.85

“We estimate Penn’s US Sports and iGaming share to increase to 6% by 2025, versus 4% in 2023, and hold within that range through 2027, driven by its ESPNBet launch in November 2023. Penn’s capital expenditures dropped to 2.6% in the first quarter compared to 10.9% in the previous quarter, driven by the launch of ESPNBet. Sports and iGaming will account for 16% of its 2024 sales.”