Nothing below is intended as financial advice. The writer is not a financial advisor and if you want professional guidance then you should hire someone who is qualified and licensed to do so. This article is for education and entertainment purposes only. Remember, the value of a stock can go down as well as up.
How many gamblers are also investors?
Probably not a question many people have asked themselves, but the UK is quickly gathering an army of private investors thanks to long term savings rates being so low and the various financial independence movements.
This was exacerbated during the COVID 19 pandemic when the market crashed and essentially put the whole world on sale, with stock prices at massive discounts, while at the same time crypto currencies and NFTs were taking off and introducing people to the idea of investment in different ways.
It is thought that around 33% of the population invest privately (this doesn’t account for money held in pensions, which is all invested by the pension company), with many more intending to start investing soon, while around 45% of the population gamble each month.
Both activities involve putting down money with an element of risk involved, and people who partake in either activity are doing so with the hope of making some profit, so it stands to reason that there will be a good number of gamblers who are also investors.
A common piece of investing advice, for beginners at least, is to stick to what you know. If you work in property then perhaps you might be able to see when Foxtons or Belvoir Lettings look cheap; while if you are a retail worker and spend all day in a shopping mall then you will know if Next or Superdry have been booming or not.
If you are a gambler, therefore, does it make sense to think about investing in gambling companies? And if so, which ones?
A Very Quick Explanation of the Stock Market
To ensure we are all on the same page, let’s just run through the absolute basics of the stock market.
Some companies are privately owned, and others are publicly owned, but all companies, big or small, are owned by someone.
Whether it is a small business like Pam’s Cakes (owned by Pam and run from her kitchen at home), or a massive company like Unilever which owns 400+ brands like Domestos, Hellmans, Magnum, and Dove.
Privately owned companies, like Betfred, are owned by one person or a small handful of people who all have a stake in the business and decide how it is run.
Publicly owned companies have been floated on the stock market, which means they have been broken up into lots of small shares, and those shares have been sold off individually – so the company can be owned by thousands and thousands of people all with different sized slices of the pie. That said, the company will not be run by all of those people, but by a CEO elected by a board, with the company publishing annual and interim reports, plus quarterly statements and any other relevent news to keep investors informed of the company’s progress.
The people running public companies will almost always own large amounts of stock as well, and these shares can be bought and sold whenever the owner likes (be they the CEO or a regular Joe like you and me) on the stock market, which means that the price of each share can go up and down depending on how in demand it is or isn’t.
There is more than one stock market, although the London Stock Exchange (LSE) is what we use in the UK. However, this means that not all companies are available on the same stock market.
Kindred Group is a good casino company example. It is listed on the Swedish stock exchange, the Nasdaq Stockholm, whereas most gambling companies known to us in the UK will be listed on either the LSE, or one of the American exchanges; the Nasdaq, or the New York Stock Exchange (NYSE).
Members of the public who buy shares are known as private investors, and they mostly buy shares through a broker. You can get direct access to the various markets as a private investor but it is expensive and has a steep learning curve, so most people start with brokers.
A broker will be more user friendly and they also have access to more than one exchange, so you can buy shares that may not be listed on the exchange in your country. They buy and sell the shares on your behalf (when you tell them to) and earn a commission each time they do so.
So all you have to do is look for companies to buy, decide how many shares you want, then click the buy button on your brokers website or app.
Should You Invest in Casino Companies?
As a sector, there is no reason to avoid gambling and casino companies unless you have some moral objection to them.
Some investors don’t like the idea of making money from other people’s losses, or from other ‘sin stocks’ as they are known (alcohol, tobacco, and weapons companies etc.), so they will stick to what is known as ‘ethical investments’ or ‘ESG’ (Environmental, Social and Governance) investments.
It’s each to their own, but I would say that investing in a casino company won’t directly take money out of another investor’s pocket. With the stock market, if the company does well then so does everybody invested in it; if you buy then sell at a profit it isn’t because someone else has lost money – i.e you haven’t ‘won’ another investor’s money. Although obviously, a gambling company does make their money in the first place from gamblers’ losses.
This personal choice aside, the gambling sector is a perfectly good option to consider when looking for stocks to buy.
Of course you must do plenty of research into the health of the specific company you are looking at, and consider the future potential based on the company’s current revenue, net profits, debts, assets, cash flow, etc., as well as any other factors that might come into play such as government legislation or global recessions.
Let’s look at investing in The Rank Group vs investing in 888 based on some fictitious numbers. What we mean by that, is that we will talk about the companies as they are in real life, but when it comes to the financial information we will make it up so the example makes sense, and also so that nobody rushes out and buys one of them based on this!
Remember, this is not financial advice or a buying recommendation, the numbers below are totally made up for educational purposes.
|Market Cap||420 million||680 million|
|Revenue||644 million||980 million|
|Net Profit||24 million||87 million|
|Net Debt||200 million||-168 million|
*When it comes to net debt, a minus (–) before the number means cash, the opposite of debt. So 888 have £168 million in cash according to the table above, while Rank are £200 million in the red.
We can see that 888 makes a lot more than the Rank Group, but their PE ratio (price to earnings) is much higher. This tells us that more people are buying 888 than Rank so they may not hold much value, it may already be priced in. In other words, everyone has already recognised 888’s potential for growth and the price has now reached a point where it is looking expensive, and unlikely to go much higher in the near future without significant news or much higher than expected earnings.
Rank, on the other hand, have had a rough time recently being mainly a land based company, so were hit hard by Covid, with profits decimated and debt piling up. The future looks brighter though and they are back in profit, and they don’t look to be in danger of folding or anything like that. They also have a bigger dividend, so if we are prepared to wait in the doldrums for a while, we could get them very cheap right now, pocket the dividend for a few years, and sell when the rest of the market realises their potential for growth and the price therefore increases. Hopefully anyway!
The above is just a quick example of how we might weigh up two different stocks in the gambling sector using very basic analysis, there is a lot more that can and should be researched, but it gives you an idea.
In general though, it’s an industry that tends to remain buoyant even when market conditions are poor elsewhere, and even if there is a dip the recovery isn’t usually too drawn out. Plus, almost all gambling companies pay a dividend, although you do run the risk of government legislation causing damage to the balance sheet and affecting sentiment.
It’s a growing sector too, with new markets opening up around the world and the big companies scrambling to establish themselves in these fertile new lands.
The American Example
America’s relaxation of gambling laws is a prime example of this. It gathered pace in 2020 and one by one states began legalising online gambling, causing something of a gold rush.
What actually ended up happening was big American companies like Caesars Entertainment and DraftKings began bidding for established UK companies like William Hill and Entain. This was because the UK companies had so much experience in the sector with pre-developed platforms and online capabilities the American companies had never needed, so they wanted to buy them out as a short cut to get their hands on this stuff and use it themselves.
For investors this was great, because when a company is bid for it is always at a much higher price than the stock is currently at, to allow for future profits and perceived value going forward. So when Caesars bought William Hill, for example, the share price shot up as you can see above.
It had been going up based on rumour anyway, but when the official announcement came in that the company had received 2 bids, the price jumped 43% in a single day. Even if you only bought £1k worth of shares at the start of that day, you would have made £430 on paper in an afternoon – if you had invested at the bottom of the covid crash, you would have made around 500% on your money.
On the flip side, when Entain received a takeover bid from DraftKings in September 2021, the share price jumped an impressive 17.6% when the news was released.
However, a month later that bid fell through, and the price tumbled to the point where it was lower than it had been before the bid was made. This writer got caught out in that one himself as you can see from the chart above, and has been down by as much as 35% on paper.
Same initial situation, but two very different results.
Types of Casino and Gambling Stocks
When talking about casino companies to invest in, your mind might well go straight to the big ones like Flutter, Entain and 888 on the London Stock Exchange, or Caesars, PENN, and MGM in America.
All good companies with a solid track record, but we aren’t limited to casino operators.
Some of the companies who make the casino games are also listed on the various stock exchanges, so we also look at the likes of:
- Evolution Gaming
- Light and Wonder
…and so on.
There are different angles to consider here, because the businesses are set up and run in a different way.
For example, IGT also manufacture real gaming terminals that are sold to casinos and pubs and the like as well as operating online slots, so they have alternative income streams, but also extra associated costs. How does this impact their income and their potential for growth?
Evolution have those studios to pay for and those live dealers to pay, but they can also stream their games to an unlimited number of casinos all over the world.
In terms of risk, a game developer won’t be hit as hard by new regulations in one specific country like an operator might be.
For example, let’s say that the UK introduced a £100 per month cap on deposits for all residents. This would be devastating to the UK gambling industry, so the share price in companies like Entain and Flutter would plummet.
While Light and Wonder may supply games to these and other companies in the UK and feel the impact somewhat, they can also sell their wares in lots of other countries that don’t have such stringent laws as well as having B2B services that don’t rely on UK players.
Thus, their share prices would be unlikely to drop as much, or at least be more likely to recover quickly. This would make them perhaps a better option for an investor who had less appetite for risk and employed a more cautious approach.
Is the Stock Market Just Another Form of Gambling?
Not really, no.
There are some parallels and it’s easy to see why people who have no experience of the stock market would say so, but they are not the same thing.
Arguably the biggest difference, is that when you buy stock you own something, whereas when you place a bet you own nothing. Some stocks pay dividends too, so they can pay you every year whereas a bet will pay you nothing unless it wins. Building on this point, the amount you can win or lose from a bet is set in stone, whereas the amount you can make on a stock is limitless and the amount you can lose is variable.
Speaking of winning and losing, with the stock market you only actually win or lose money if you sell. Until you click the sell or buy button any profit or loss you have made is only on paper, it’s not real yet. So you can buy a stock, watch it go down 10%, hold on, then watch it go back up and over the price you paid before selling for a profit. With a bet you either win or lose once the event is over, but with the stock market it is up to you when you crystalise a loss or take a profit.
The reasons why a stock price move up and down are numerous and no one can be 100% sure which way they will go, so there is definitely risk involved in trading, but you can mitigate this by using stop losses (an automatic sell trigger that sells the stock if it gets to a certain price) or alerts.
The other key difference is that there is so much research you can do into a stock before you make a decision, and so much historic information available online as to how the market behaves, that you can decide how much risk you want to take with a trade and when.
For example, you might think that Flutter are a brilliant company that are going to grow massively over the next 5 years, but you don’t want to pay the £105 per share price tag currently attached because you think the true value is more like £95 per share. In this case, you can stick them on a watch list and keep an eye on the price then buy at a later time.
You can’t do that with a bet. If you wanted to bet on Jammy Dodger to win the 18:40 at Haydock then you just have to place the bet, the race won’t wait for you. Yes, the odds might move a bit, but you can’t do much in the way of timing the bet strategically.
A trader who does their research, manages their money and their risk, and has a balanced portfolio of stocks, is arguably far less likely to lose their shirt than a gambler betting with similar amounts of money.
They are not the same thing.