Is the iGaming Industry a Good Bet for Investors?

 

 

Many stock market indices have reached record highs right around the world, central banks continue to print more money, and prices for commodities like oil, gold, and cryptocurrencies are more volatile than we’ve seen for a long time. The market for online casinos, for example, is incredibly competitive and is packed with some of the biggest brands in the Western World. A cursory glance at a list of casino reviews will reveal some of the household names that have launched their own casinos.

A large number of companies have price-to-earnings (P/E) ratios in the hundreds or even thousands. For example, at the end of February 2021, Tesla had a P/E of 1,220.78, while Peloton Interactive had a ratio of 190.45, down from a high of nearly 600 in December.

While not an accurate indicator on their own, high P/E ratios can be a sign to investors that the market is likely becoming overpriced and that a correction could be on the way.

Some experts argue that current market conditions are different, citing factors like near-zero interest rates forcing investors into the stock market to achieve inflation-beating returns and others say that many companies with high valuations can justify their lofty share prices.

Unprecedented market participation from retail investors, as witnessed with the recent GameStop saga, shows us that we can’t rely only on past trends to predict what’s going to happen in the future.

Unfortunately though, as investors, we can only know two things for certain: that what goes up has to come down eventually, and that it’s nearly impossible to accurately predict when it will happen.

However, even as many value-investors sit perched right on the edges of their seats, those that plan to keep their holdings for several decades can still comfortably take long positions (provided they’re comfortable with potential paper losses in the short term).

Is the iGaming Industry a Good Investment?

One area that may interest investors is the iGaming industry. It, like much of the wider gaming sector, saw massive growth in sales during 2021 and is projected to have a very good 2022. This was something that many investors were quick to spot, driving up the share prices of some leading companies by as much as 100%.

This followed (and sometimes beat) the trajectory of many of the world’s biggest blue-chip companies in the United States. For example, Apple is currently trading around the $125 mark, five times higher than in late March 2020. Over that same period, Amazon stocks roughly doubled in value from around $1,700 to $3,300.

But with share prices so high, have the investors buying iGaming company stocks now already missed the boat?

The Case Against Investing in iGaming Stocks

In the UK alone, most major newspapers and commercial broadcasters have their own gaming sites, in addition to bingo and sports betting arms.

With so much competition, there’s always a chance that a price war could lead to bigger and bigger bonuses. This would increase customer acquisition costs and drive down profit margins. However, wagering restrictions and other terms and conditions can usually help rein this in.

There is always a risk that national (or state) regulators can move the goalposts for iGaming companies, making it harder to operate within their jurisdiction or render it completely unprofitable to do so. We saw this in the United States over a decade ago, with most major brands leaving the country.

In the United Kingdom, the Gambling Commission banned the use of credit cards for making deposits to iGaming companies back in 2020. Six years earlier, changes to the law prevented companies without a license issued in Great Britain from serving customers on the island, something that had been possible before then.

While few would argue that regulation isn’t necessary for such a market, it can change the profitability of the companies operating in it.

Finally, anyone looking at the share prices of iGaming companies may conclude that the growth seen in the last 12 months is unlikely to be sustained into the future and that their capital could be at risk should they invest.

 

The Case For Investing in iGaming Stocks

To value investors, the short-term price fluctuations in share prices are not (always) of much significance. As the Oracle of Omaha, Warren Buffett has said himself, “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

After all, anyone buying a “wonderful company” is going to expect its share price to increase over several years or decades.

Therefore, the fact that iGaming companies have seen explosive growth in their share prices may not concern investors when they consider other fundamentals look favorable.

One of the biggest factors that might make iGaming companies look like good investment opportunities is the US market. While around a decade ago, many iGaming companies quickly pulled out of the American market, they’ve all been rushing back since May 2018, when the Supreme Court struck down the Professional and Amateur Sports Protection Act, a law that prevented betting on most sports.

Since then, nearly two-dozen states have passed laws that permit wagering through mobile apps and websites, with some also permitting online poker and casino games. In states like Pennsylvania, where iGaming companies have been operating for some time, revenue records are being beaten every few months. This trend is likely to continue for some time, with more states going online in the coming years and more bettors signing up as the practice becomes more mainstream.

In Europe, where the industry is more mature, mergers and acquisitions could also prove to be good opportunities for investors. Some iGaming companies may be willing to pay a premium to acquire other operators if they believe that an M&A could yield cost savings through economies of scale or an easier route into a new segment of the market.

Therefore, on both sides of the Atlantic Ocean, growth in profitability for iGaming companies is a probable outcome. This could lead to sizable dividends and stock price increases for investors.

In Conclusion

Of course, there are no guarantees in either direction and you should always seek independent advice before making any investment decisions, but iGaming companies may be a good addition to many investors’ portfolios.

The high price for these companies may put some people off, but there may be enough value still in them to make it an enticing offer for others.