3 Must-Buy Gaming Stocks to Thrive on Promising Market Trends

The Zacks Gaming industry benefits from macroeconomic tailwinds, particularly the Federal Reserve's interest rate reduction and strong demand for sports betting. The industry is experiencing an upside, thanks to increased visitation and spending per visit, especially from younger demographics. Stocks like Flutter Entertainment plc FLUT, DoubleDown Interactive Co., Ltd. DDI and GDEV Inc. GDEV will likely gain traction from this upbeat demand.

Industry Description

The Zacks Gaming industry includes companies that own and operate integrated casinos, hotels and entertainment resorts. Some industry players also deliver technology products and services across lotteries, electronic gaming machines, sports betting and interactive gaming. Some firms develop and operate gaming establishments and associated lodging, restaurants, horse racing and entertainment amenities. Many companies are involved in developing and selling gaming applications. E-sports or sporting events or tournament services, content management systems, video software, mobile applications and e-sports data platform solutions are provided as well.

Key Themes Shaping the Gaming Industry

Interest Rate Cut to Aid Gaming Industry: In its latest policy meeting, the Federal Reserve reduced interest rates by 50 basis points to stimulate the economy and support the labor market. The Fed has kept the key interest rates at 4.75-5% and eased its monetary policy for the first time in four years. According to the Fed's Summary of Economic Projections, officials anticipate another half-point rate cut later this year, with additional cuts expected in 2025 and 2026. Most gaming companies rely on debt to finance their operations, expansion projects and renovations. A reduction in interest rates lowers the cost of borrowing, allowing gaming companies to take on new loans or refinance existing debt at more favorable terms. This can free up capital for growth initiatives and reduce interest expenses.

Macau Gaming Revenues Improving: The industry benefits from improving visitation. In September, Macau's gross gaming revenues rallied 15.5% year over year. Robust investment will continue to aid the gaming industry in Macau. Casino operators are adopting a disciplined operational strategy by streamlining business processes, enhancing marketing approaches, and renegotiating contracts with vendors and third parties. There is an intense emphasis on improving service quality and staffing levels to cater to gamers better.

U.S. Commercial Gaming Revenues Robust: The gaming industry in the United States continues to boost investor sentiment. Per the American Gaming Association data, revenues from gambling hit a record high of $17.63 billion in second-quarter 2024, up 8.9% year over year. The U.S. gaming industry will continue to improve. This marked the industry's 14th straight quarter of annual revenue growth.

Sports Betting Acts as Major Driver: The legalization of sports betting in Delaware, Mississippi, New Jersey, New Mexico, West Virginia, Pennsylvania, Rhode Island, Montana, Indiana, Tennessee, Illinois and New Hampshire has been driving growth for a while. Bettors can place wagers via digital platforms in Connecticut, Kentucky, Michigan, Massachusetts, Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona, Montana, Colorado and other states. Some popular gaming applications include DraftKings, Barstool, FanDuel, BetMGM, BetRivers, Fox Bet and BetMonarch.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Gaming industry is grouped within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #103, which places it in the top 41% of more than 250 Zacks industries.

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry's position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group's earnings growth potential. Since April 30, 2024, the industry's northbound estimate for the current year increased 9.5%.

We will present a few gaming stocks that you can add to your investment portfolio, given their strong fundamentals. But it is worth looking at the industry's shareholder returns and its current valuation first.

Industry Underperforms the S&P 500

The Zacks Gaming industry has lagged the S&P 500 Index and the broader Zacks Consumer Discretionary sector in the past year.

The industry has risen 27.4% over this period compared with the S&P 500 Index's growth of 32.5%. In the same time frame, the sector has rallied 17%.

One-Year Price Performance

Gaming Industry's Valuation

Since gaming companies are debt-laden, valuing the same based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio makes sense. The industry currently has a forward 12-month EV/EBITDA ratio of 11.93. The space is trading at a discount compared with the market at large, as the forward 12-month EV/EBITDA ratio for the S&P 500 is 14.47.

In the past five years, the industry has traded as high as 22.53X and as low as 6.56X, with a median of 15.30X, as the chart below shows.

Enterprise Value-to-EBITDA Ratio (Past 5 Years)

3 Gaming Stocks to Watch for

Flutter Entertainment: The company has been witnessing excellent growth across its brands in the U.K., achieving market share gains for 10 consecutive quarters based on gambling commission data. Flutter Entertainment completed the migration of FanDuel Casino to its proprietary technology, enhancing platform stability and allowing access to exclusive content.

This Zacks Rank #1 (Strong Buy) company's shares have gained 6% in the past three months. Earnings estimates for 2024 have increased to $5.71 from $4.07 in the past 60 days.

Price & Consensus: FLUT

DoubleDown Interactive: The company is benefiting from its robust social casino business. In second-quarter 2024, the company's social casino business saw a 7% revenue increase, marking its third consecutive quarter of year-over-year growth, which indicates a growing market share.

This Zacks Rank #1 player's shares have gained 12.8% in the past three months. DoubleDown Interactive's 2024 earnings estimates have increased 13.5% to $2.35 in the past 60 days.

Price & Consensus: DDI

GDEV: The company's refined vision, which emphasizes sustainable growth and operational efficiency, bodes well. Its focus on delivering top games, coupled with the recruitment of industry talent, supports its commitment to creating exceptional player experiences and solidifying its market position for long-term success.

Shares of this Zacks Rank #1 player have grown 29.4% in the three months. GDEV's 2024 earnings estimates have increased to 60 cents from 15 cents in the past 60 days.

Price & Consensus: GDEV

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