Reviewing the Three Best Casino Stocks to Buy Now

Capison Pang

Three best casino stocks to buy now include a sports betting platform changing online gambling, the world’s sixth-largest casino and an organizer of a Triple Crown horse race.

Like the rest of the travel and tourism industry, casino stocks have been hit hard by the COVID-19 pandemic over the past two years. Casinos have seen their shares remain at a fraction of their pre-pandemic prices. As a result, casino stocks are immensely underpriced.

Rising cases from the Omicron variant of COVID-19 have played a significant role in subduing the growth of casino stocks in recent months. However, tourists and bettors have begun displaying a propensity to move past COVID-19. The American casino industry recorded a breakout year in 2021, despite the emergence of the Delta variant of COVID-19, raking in over $44 billion in sales.

Government restrictions designed to combat COVID-19 are also seemingly coming to an end. Omicron has “outcompeted” the less contagious Delta variant, providing hundreds of millions worldwide an additional layer of natural immunity against its more dangerous cousin. National governments across the globe, ranging from Israel to the United Kingdom, have begun pursuing a return to normalcy policies. At home, even states with the most stringent COVID-19 policies have begun lifting mask mandates.

The rise of online betting during the pandemic has added the positive attribute of soaring growth to an industry known for high-profit margins. Many United States casinos emphasized the development of their online gaming platforms over the past two years, allowing companies to increase their total addressable market significantly. The global online gambling industry is projected to reach $100 billion by 2026, double its $50 billion market size in 2019.

The casino industry is undoubtedly a winner in the coming years. However, which stocks should you choose out of the dozens of casino investments available? Luckily, we have identified the top three casino stocks to buy now.

3 Best Casino Stocks to Buy Now: #3

DraftKings Inc. (NASDAQ:DKNG)

DraftKings Inc. (NASDAQ:DKNG) is an online sports entertainment and gaming company founded in 2012 and headquartered in Boston, Massachusetts. The platform offers fantasy sports, sports betting, iGaming and casino products to consumers and businesses.

DraftKings has encountered a significant slide over the past year due to missed earnings and fears about Omicron’s impact on professional sports. The company’s stock has fallen by 69.7% over the past year. DKNG’s movement over the trailing 12 months is graphed below, along with a 50-day moving average to better illustrate change.

Chart provided by Stock Rover.

However, the market appears to have overcorrected. Savvy investors have an opportunity to generate triple-digit returns.

DraftKings has successfully combined the consumer base of North American sports and the profitability of online gambling to create an industry titan. The North American sports market is valued at $77.9 billion. The American online gambling industry possesses a sky-high 22.1% profit margin. The company has managed to construct a duopoly in the sports betting market, online gambling’s fastest-growing vertical, squaring off against its only true rival, FanDuel (OTC: PDYPT). In less than 10 years, DraftKings has reached a market capitalization (market cap) of $9.0 billion.

DraftKings has become the leading force in online gambling in the United States with an 18.3% market share of an industry worth $27.9 billion, beating out gaming icons such as MGM Resorts International (NYSE:MGM) and Penn National Gaming (NASDAQ:PENN).

However, DraftKings is not content with just being the market leader. DKNG’s lackluster 2021 performance is not backed by the company’s underlying financials. The company has increasingly widened the gap between it and its industry rivals. In the two years since its 2019 initial public offering, DraftKings has increased its sales by 254.5%. The industry average revenue growth over the last year is 29.2% and 11.5% over the previous three years.

DraftKings’ surge is only expected to continue. The company is forecasted to see a 49.6% jump in revenue in 2022. DKNG is projected to collect a 39.2% increase in year-on-year revenue in Q1 2022 alone.

The company’s success is due to its aggressive expansion strategy, prioritizing growth over profits. DraftKings boasts one of the best marketing teams in the industry. The company has seen its monthly paying users more than double in two years, from 684,000 in 2019 to 1.49 million in 2021, equaling an 118.4% increase. Paying customers also have dramatically increased their spending, from an average of $39 per month per user in 2019 to $67 in 2021.

In April 2021, DraftKings announced a deal to become an official sports betting partner of the NFL. The agreement will help the company tap into the league’s 410 million fans globally. Football is the most popular sport among bettors in the United States.

DraftKings has never recorded a profit. However, over the long run, the company will inevitably become profitable. It costs DraftKings an average of $370 to acquire a customer. In comparison, each customer produces $2,500 in lifetime value for the company. DraftKings has repeatedly stated that it aims to reach profitability within two to three years of going live in a given state, and it has delivered in New Jersey, the only state to reach the three-year milestone so far.

The rapid growth of DraftKings in recent quarters and the potential for online sports gambling have caused Morgan Stanley analyst Thomas Allen to predict that the company will reach profitability by 2024. Despite the recent downturn, DraftKings represents the future of sports betting, making the stock a buy.

A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $36.18, 72.5% higher than its latest closing price of $20.96, earning DKNG a “BUY” recommendation from Stock Rover and a place among our three best casino stocks to buy now.

3 Best Casino Stocks to Buy Now: #2

Churchill Downs Inc. (NASDAQ:CHDN)

Churchill Downs Inc. (NASDAQ:CHDN), founded in 1875, is a legendary horse racing and entertainment corporation. The company, known for its annual Kentucky Derby race, operates over 16 racing tracks and casinos across the United States. Churchill Downs is headquartered in Louisville, Kentucky, and has a market cap of $8.5 billion.

The name Churchill Downs is synonymous with the famous Kentucky Derby horse race held every spring, and for a good reason. The Kentucky Derby is the first and arguably most renowned event in horse racing’s highly prized Triple Crown. Specifically, 16.5 million viewers tuned into the 2019 race.

Two years later, 14.4 million individuals watched the Kentucky Derby in 2021, a near-full rebound to pre-pandemic figures. The famous Derby will likely return to complete normalcy in 2022 as Wells Fargo analyst Daniel Politzer predicts that the Derby is an “economic rebound catalyst in 2022 due to pent-up event demand following the ongoing health crisis.”

Horse racing presents some of the highest barriers to entry of any betting industry. Races are built on legacy. Rivals not only have to construct and maintain expensive race tracks but also negate decades or even centuries of history to compete. The Kentucky Derby, the youngest of the Triple Crown races, was first run in 1875. Furthermore, Churchill Downs has managed to leverage the popularity of its horse races to expand into other areas of the gaming industry.

The Kentucky Derby and other horse races are important revenue streams for Churchill Downs. However, live and historical racing’s primary boon to the company is its ability to draw consumers to its other business segments. The races allow Churchill Downs to directly tap into the millions of horse racing fans worldwide, providing the company millions of dollars worth of free publicity without additional advertisement spending.

Churchill Downs is divided into four main business segments: live and historical (horse) racing; TwinSpires, the company’s online wagering segment; gaming; and “all other.” Gaming, encompassing table games, poker and slot machines, is the largest, producing 42.5% of the company’s total revenue. Live and historical racing is the smallest business segment, accounting for only 25.9% of the company’s revenues. TwinSpires generates 27.4% of revenues, while the other business segment accounts for the remaining sales.

Churchill Downs’ growth of TwinSpires has been especially impressive, showcasing its ability to expand into new markets and proving it is possible to teach an old dog new tricks. TwinSpires has become the company’s second-largest business segment, despite only launching in January 2021. The online betting platform is potentially already worth up to $1.5 billion.

Churchill Downs has an unprecedented opportunity to expand its TwinSpires and gaming business segments in the company’s home state of Kentucky. The Kentucky gaming market is set to increase dramatically as the state’s legislature is on track to legalize sports betting in 2022. Politzer indicated that the Kentucky gaming market is already “large and underpenetrated, creating significant growth opportunities for Churchill Downs.”

The company maintains a Stock Rover growth score of 98/100 and is forecast to record a 51.1% increase in sales in 2021 once its 2021 10-K’s are released. As a result, Churchill Downs has managed to weather the recent downturn in the casino industry better than most. CHDN has seen its share price encounter a modest drop of 1.7% over the trailing 12 months. CHDN’s change in price is displayed alongside a 50-day moving average.

Chart provided by Stock Rover.

Churchill Downs is projected to continue its growth into 2022, with a respectable 14.5% increase in revenue. However, CHDN is a value investment and not a growth stock. Its appeal to investors is being undervalued relative to its actual market value rather than experiencing high growth year-over-year. The company possesses a (share) price-to-earnings (P/E) ratio of 38.7 and an enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio of 19.9 below the industry averages of 88.6 and 22.2, respectively. Churchill Downs presents investors with an opportunity to take a stake in a historic and undervalued entity with growth potential.

A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $280.86, 19.6% higher than its latest closing price of $234.78, earning CHDN a “STRONG BUY” recommendation from Stock Rover and a place among our three best casino stocks to buy now.

3 Best Casino Stocks to Buy Now: #1

Caesars Entertainment Inc. (NASDAQ:CZR)

Caesars Entertainment Inc. (NASDAQ:CZR) is an American resort and casino corporation based in Reno, Nevada. The company owns and operates more than 50 gaming properties nationwide. Caesars is the sixth-largest gambling company globally, with a market cap of $17.1 billion.

Caesars Entertainment is one of the oldest and most iconic gaming brands in the world. The company first opened its doors in 1937. However, there is arguably no more exciting time in the company’s history than now. The company has elevated itself into the crown jewel of casino investments.

The current Caesars is technically a different entity than the legacy Caesars Entertainment. In July 2020, Eldorado Resorts acquired the original Caesars company for $17 billion. Despite being the acquirer, Eldorado promptly changed its name to Caesars Entertainment to capitalize on the brand’s legacy.

The combined entity promptly moved to purchase British online gambling corporation William Hill in April 2021 for $3.7 billion. The deal is expected to generate up to $800 million in synergies for Caesar and allow the casino to better tap into the $27.9 billion online gambling market in the United States. William Hill is one of the most well-known brands in online gaming.

Caesars has announced plans to sell William Hill’s non-U.S. operations for $3.0 billion, a deal set to finalize in early 2022. Bank of America Securities analyst Shaun Kelley estimates the sale could increase CZR’s stock price by up to $5 per share.

Caesars Entertainment has always been an attractive investment in the entertainment and gaming industry. The company has grown its revenue, on average, by 56.3% annually over the past 10 years. However, Caesars’ recent deals have elevated it into an industry superstar.

The company currently enjoys a 96/100 Stock Rover growth score. The casino has seen its sales skyrocket by 142.1% over the past 12 months. The company raked in $8.4 billion in sales in 2021, shattering 2020 and 2019 figures of $3.5 and $2.5 billion, respectively. Caesars’ growth shows no signs of slowing down, with year-on-year revenue growth for Q1 2022 forecasted at 54.8%.

Caesars, however, has been hurt by COVID-19 and the subsequent Delta and Omicron variants. The company has suffered nearly $2.9 billion in losses over the past two years. The losses have caused CZR’s price to remain relatively flat, with the stock only growing by 0.9% over the past year. CZR’s share price and 50-day moving average over the past 12 months are charted below.

Chart provided by Stock Rover.

The company has been forced to leverage its balance sheet to remain afloat over the past two years, making it a riskier investment than other established stocks in the gaming industry.

However, the firm’s potential is well worth its risk. Caesars’ $1.2 billion debt sale in September 2021 has allowed it to refinance a significant portion of its outstanding debt. The company’s 1.2 current ratio is high but manageable.

Meanwhile, its revenue growth remains far above most of its competitors, and its share price has dropped below its fair market value. CZR possesses a (share) price-to-sales (P/S) ratio of 2.0 and (EV/EBITDA) of 19.7. The industry averages stand at 3.5 and 39.4, respectively. Caesars Entertainment seems too enticing of an investment opportunity to pass up as it is projected to return to profitability in 2022 with an earnings-per-share (EPS) of $1.08.

A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $121.10, 45.8% higher than its latest closing price of $83.06, earning CZR a “STRONG BUY” recommendation from Stock Rover and a place among our three best casino stocks to buy now.

Capison Pang is an editorial intern who writes for www.stockinvestor.com and www.dividendinvestor.com.

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