Gambling stocks take a tumble

Peel Hunt, in a note to investors (14 Jan 2022), reported that, over the past three months, the share prices of 41 of the 54 gambling companies it covers are down and 27 have fallen more than 10%.

It’s fair to say that gambling stocks are now partially “tech stocks”, whereas previously they were always considered to be leisure stocks. Technology stocks have taken a tumble themselves recently, caused by higher interest rates in the USA. Are gambling stocks trading lower because of this or is there something fundamental to the decline?

Robert Armstong, based in the US, writing for the Financial Times puts it this way:

‘Rising interest rates are bad for tech stocks. The tech focused Nasdaq Composite shed 4.5% in the first five days of trading of 2022. The worst annual debut since fear of a slowdown in China sent shockwaves across global financial markets six years ago’.

But why? Tech stocks are growth stocks that are investing for future earnings, buy now with the promise of better returns later.

Conventional wisdom is that when bond yields rise, investors get lesser returns at present by holding companies that might give higher returns in the distant future (Tech stocks). Therefore, companies that are returning good dividends now, for example Shell, Nestle, Proctor and Gamble become more valuable.

Looking back over 12 months, Flutter reached a peak in March 2021 at 16,732. At the time of writing the price is 11,435 – a 31% decline – and over the last twelve months down 23%. Entain Group has done better because it has been subject to a bid from DraftKings, but still down 15% from the peak in September 2021.

While the decline in tech stocks has not helped, you can conclude something more fundamental is at play.

The UK Government’s white paper, soon to be announced, has created uncertainty and investors hate uncertainty. Add to this a change in attitude toward i-gaming in the major EU countries. Gambling will be tolerated but under very strict controls. High taxes, deposit limits, stake limits on slots all lead to lower profits.

Wynn’s remarks on the short-term viability of the US market confirmed by Jason Adler of Spring Owl Asset Management may have caused investors to take a closer look. The US i-gaming is presently loss making. Not a good place to be when interest rates are rising.

It is a double whammy for the industry: regulation and higher interest rates causing a stock market rotation away from tech or unprofitable highly leveraged companies into stalwart stocks that Warren Buffet likes. Think Coca Cola, American Express, Bank of America and Apple (more than a tech stock)

But the gambling industry will adapt, it always has done.

By Warwick Bartlett