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Special Report: How the Global Inflation is Affecting the Gaming Sector
By Jeff Osienya Oct 25, 2022 IndustryWhile global economies are facing textbook recession characteristics, the gambling industry is still standing strong. Here’s a look at how the current global inflation has impacted the gaming sector so far and what we should expect in the coming months.The latest GDP data indicates that the US economy is in recession after experiencing two successive quarters of an economic downturn. The recession has resulted from the Covid pandemic and was further aggravated by the Russia-Ukraine war. Consequently, prices of essential commodities such as food, rent, and gas are skyrocketing.
As people tighten their belts to brace for more challenging times ahead, you would think the casino industry being non-essential spending, would be one of the first to suffer. However, if reports from the recently concluded Global Gaming Expo (G2E) are to go by, the gaming industry is yet to take a hit. During meetings at G2E with casino industry management teams, Edward Engel, an analyst at Roth Capital Partners, stated that casino operators are yet to experience a gross gaming revenue (GGR) decline. He said:
Quote“Operators and suppliers echoed sentiment from recent quarters that gaming demand remains consistent with prior months. This holds across regional class II and III markets, as well as the LV Strip. But there is potential for choppiness in LV Locals.”
Engel also highlighted that the most noticeable change is how casino operators allocate their capital. He pointed out that after months of share repurchase activity, they are now focused on reducing debt burdens.
How was the Gaming Industry Impacted in Previous Recessions?
All along, it was believed that the casino industry was recession resistant until 2007. However, the 2007-2009 global financial crash proved the theory wrong, as casinos across the US saw a decline in revenue, which took them many years to recover.
During the 2008 recession, the US housing market collapsed, sequentially leading to a lending crisis. Some of the victims in the gambling industry claimed by the Great Recession include the St. Regis Suites at the Palazzo, Resorts World Las Vegas, and the Fontainebleau Las Vegas.
In 2007, the construction of the Fontainebleau Las Vegas commenced; but come 2009, lenders stopped funding the project, which was 70% complete. For fourteen years, it remained that way through a succession of owners and bankruptcy until recently, when the works resumed and is expected to be done by 2023.
In early 2007 the construction of the $465 million luxury condominium tower called the St Regis Residences commenced, but in November 2008, the project was stopped due to the recession. Unfortunately, up until today, the luxury condominium tower is yet to be completed.
How's The Global Gaming Sector in 2022 Looking?
Despite the uncertainty, amid the global economic depression, the gambling sector in the US is still strong based on the revenue from the first five months of 2022. For instance, in March, revenue stood at $5.3 billion, the highest figure recorded in the history of US gaming. The total revenue for Q1 of 2022 was $14.3 billion, which was almost at par with Q4 2021, with $14.35 billion. In Q2 2022, the all-time quarterly record was shattered again after the US gaming sector generated $14.81 billion worth of revenue.
Over the past two years, there has been a growing demand for internet-based gambling globally. The main drivers of this shift are increased smartphone adoption, the Covid pandemic, and increased internet availability pushing land-based casinos to move to iGaming.
It was expected that after the post-pandemic lift on in-person gambling, and people reverting to land-based casinos, iGaming would dip, but that is not the case. Instead, it has left operators hopeful about the industry’s future. Additionally, many stakeholders believe online gambling will be resilient during the upcoming recession and maintain that the sector will continue growing steadily.
As the US gambling market is known to set the pace, the quarter-by-quarter growth should put global casino operators at ease. However, this is not always the case. In the UK, players are a bit cautious, with online slot revenue declining by 5% in the first quarter of 2022 while time spent also declined by 2%. Additionally, the revenue for the quarter declined by 1% to £1.2 billion; however, these numbers are not alarming the industry’s stakeholders.
In Lithuania, there was a 90% increase in revenue, totaling £43.4 million in quarter one. Revenue from online slot games increased by 60%, whereas revenue from table games jumped by 25%.
Gaming Supplier Mergers and Acquisitions Could Increase in 2023
Besides a consistently thriving industry, another trend that might come up in 2023 is consolidation in the gaming supplier sector.
An example is in August 2022, Inspired Entertainment offered to acquire PlayAGS for $10 a share. Although the talks fell through, Engel is of the opinion that in 2022 there will be more mergers and acquisitions. He said:
Quote“Suppliers believe 2023 can meet/exceed 2022, as the replacement cycle fully recovers, with potential upside if GGR does not weaken in a recessionary environment. M&A was another theme during the conference, particularly after INSE bid for AGS in Aug. Chatter at the conference suggests private valuations are starting to compress towards public ones, which could lead to an uptick in M&A for the group, particularly INSE.”
Engel also believes Inspired Entertainment will continue looking for acquisition opportunities in the US. Other companies whose M&As have fallen through the cracks this year include Allwyn and Playtech, whose individual plans to go public faltered due to market volatility.
Things are Looking Up for Gaming Companies
Due to global downturn fears, characterized by inflation and increased interest rates, the performance of gaming company stocks is in question. However, Engel believes there is a silver lining as it provides opportunities for long-term market participants to work jointly with some gaming companies with low valuations.
For example, while Golden Entertainment’s second-quarter earnings failed to meet Wall Street estimates, some analysts are still bullish. Although Golden entertainment has no presence along the Las Vegas strip, its resort, the Strat, enjoys the strip’s high traffic. Engel thinks the Strat financial results from the last quarter of the year could outperform the numbers before Covid. Engel highlighted that:
Quote“The LV Strip convention schedule is approaching pre-COVID levels, where SEMA in November and CES in January should lift industry results. Meanwhile, March will benefit from two weekends of March Madness on the LV Strip. Formula 1 is also a major catalyst in 4Q23, followed by the Super Bowl in 1Q24.”
Moreover, shortly after rebranding from Esports Technologies, EBET noted that their quarter-on-quarter revenue increased by 166%. At the end of quarter one, the revenue was $19 million, and the gross profit stood at $7 million.
Thus, based on current performance trends and analysts’ projections, the global gaming industry will likely stand tall against the recession wave. Still, only time will tell as we continue edging closer to the trough of the dip of the projected recession.
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