What Happens in Vegas…

By Portfolio Manager, Dave Ruff, CFA

Living in Reno, Nevada, my wife and I frequent a few favorite restaurants located in casinos.  Our routine often includes me reminding her of the house edge.  In other words, the percentage the casino expects to keep as gross profit on a bet.  Usually just a few percentage points for most games, it can sometimes be excessive.  For example, the double six bet on the craps table looks enticing, paying 30 to 1.  The prospect of collecting $3000 on a $100 dollar bet allures, but many fail to realize that the odds are decisively in the house’s favor, with the probability of winning at 1 in 36.  This calculates to a lucrative 16.67% house edge.  Fortunately, Mrs. Ruff prefers video poker with a lower house advantage.  Since my comments about the house edge financing these grand casino structures rarely deters her from playing, I’m resigned to accepting her video-poker-playing as a lesser evil.  After all, she claims to be a lucky person.  Taking advantage of this thinking by the masses, the gambling industry, although scarcely profitable for most gamblers, can provide investors with attractive long-term returns.  We participate in this industry, but probably not in the way you think.

Notably, recent short-term performance shows the industry’s potential.  Surging 36.29% over the last 12 months ending August 31st, the global Casinos and Gaming group impressively outperformed the major indices.   For comparison, the S&P 500 advanced 15.94%, and the MSCI ACWI IMI, a global index of large, mid, and small cap stocks, gained 13.33% over the same period.  A leading subset in the Consumer Discretionary sector, few other areas of the market matched this group’s return, even when compared to many categories in the Technology sector.  Of course, astute readers realize this resurgence mainly reflects the post-pandemic recovery in both Las Vegas and Macau. 

The gambling meccas of Las Vegas and Macau rate as the most popular casino cities in the world.  They recorded, respectively, roughly 40 and 42 million visitors in 2019, before the onset of Covid.  Despite the phrase “what happens in Vegas…” you know how it goes, these visitors share their experiences, at least the positive ones, with friends, family, and colleagues.  Augmenting these stories are city photos featuring the largest, grandest, most luxurious hotel-casinos with chic and iconic names, such as the Bellagio, Cosmopolitan, and Caesars Palace in Las Vegas, as well as Macau’s Venetian Macao, City of Dreams, and Galaxy Macau, strategically positioned a short ferry ride across the Pearl River Delta from Hong Kong.  With their glitz, glamour, and seemingly endless entertainment options, many people understandably jump at the opportunity to exchange the pedestrian, monotonous daily routine for a chance to live like a “high roller”, with a possibility of hitting a jackpot.   It’s no wonder these famous casino cities continue to rank high as aspirational destinations for those who have not yet made the trip.  Adding first-time visitors each year to the habitual regulars should help keep tourist numbers rising.  Indeed, both cities witnessed a rapid resurgence in monthly visitations earlier this year.  According to the Las Vegas Convention and Visitor’s Authority, Vegas’ latest data shows 3.5 million visitors for July, already back to the 2019 monthly average.  The Government of Macau data indicates the city is riding a recovery wave as well.  July’s total of 2.75 million visitors continues the ramp from the comparatively modest 975,000 visitors in January, but still trails the 2019 monthly average of 4.06 million visitors per month. 

Interestingly, the GGR, or gross gambling revenue, in both cities more than mirrors visitor growth.  In other words, the average GGR per visitor in 2023 significantly outpaced the same statistic in 2019 by 46% in Las Vegas and 24% in Macau.  That said, we expect GGR growth to slow significantly as these cities achieve full occupancy – something apparently already happening In Vegas.  Although casinos use tactics like upselling to generate short-term growth, achieving sustainable, meaningful long-term growth requires entry into new markets or adding properties to existing markets – a very capital intensive, time consuming, and regulatorily burdensome process.  Casino operators dream of generating growth without these headaches.  This makes investments in traditional casinos less attractive.

Enter the rise of online gambling, whose growth surpasses offline.  Although still subject to regulatory scrutiny with lengthy approval times, online avoids the permitting process and construction expense of the physical casino.  Facilitated by blazingly fast broadband Internet in many jurisdictions providing 24/7 access, and relaxed gambling regulation in many countries including the US where 19 states legalized some form of online gambling over the last few years, we look for the industry to continue its rapid transition with online gambling grabbing a greater share of the industry’s gambling budget.   States and countries, tempted by this sizeable new revenue source, see this as a way to help plug spending deficits.  Moreover, the convenience of online gambling proves irresistible to many.  Players access a wide variety of games with a plethora of options through their smartphone, laptops, and tablets.  No longer having to deal with the hassle and costs for airfare and hotel accommodations, the casual (hopefully, not addicted) gambler places bets from the comfort of his or her home.

Although nascent compared to traditional gambling, increased promotion and visibility drive online betting growth.  Estimated to be $95 billion in 2023, some project growth at 12% per year through 2030.  Sports betting accounts for a large proportion, especially in the United States, but poker and other casino games also score high in popularity. 

One company held in our International and global portfolios focuses exclusively on developing and producing complete live casino solutions for its global customers, which include both online operators and traditional casinos.  With live casino, players experience the excitement of a real casino, but they can be at home or anywhere.  The dealer, usually an attractive lady or handsome gentleman operating from a company studio in Eastern Europe, runs the game.  Widely regarded as the undisputed market leader in these video-streamed gaming solutions, we believe the company will generate impressive growth in this rapidly growing industry.  Its leadership should continue with a full set of traditional live dealer games, for example, Live Roulette and Live Baccarat, combined with an unrivalled offering of unique, creative, and fun live game shows like Crazy Time, Funky Time, and Monopoly Big Baller.  The company’s greater scope of offerings and economies of scale creates significant entry barriers and makes it the preeminent gaming partner. 

On a final note, after video poker, I’ll ask my wife, “How did you do?”.  More often than not, after her reply, I make the “L” with my thumb and index finger, place it on my forehead to signal the universally understood “Loser”.  Obviously, not my wife’s favorite gesture, despite my assurance the “L” means “long-term winner”.  However, by placing your “bet”, or better said, investment on the house or in this case, the technology and service provider, we think you’ll come out ahead. 

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.