Gambling companies which include bookmakers, casino operators and trading platforms tend to be strong stocks for investment. We’re going to take a look at a couple of reasons why these companies retain strong stock market performance even in market downturns.
Market Growth and Size
These companies are generally operating in a growing market; more and more people are gambling and
in many different ways. In the UK 17% of adults gamble in one way or another. As smart phone and tablet proliferation continues the opportunities will undoubtedly increase. Investors like to see a large Total Addressable Market (TAM) and companies operating cross border inevitably have huge markets. Any company that can break into new markets in developing countries will see their reach increase even further.
Technology like this which supports gambling is getting more advanced by the year. Virtual reality, cryptocurrency and online gaming software is becoming so advanced that the level of possible innovation is so high that the companies are limited on what they can offer only by their imagination.
Barriers to Entry
To set up a company that operates in gambling is laden with difficulty. If you are taking bets you need the liquidity and infrastructure to price your markets. Brand is hugely important in this sector, there are already so many key players that breaking into the consciousness of consumers is difficult – especially when most have a favoured brand.
Regulation is strict. The anti-gambling lobby is getting stronger and the government is under increasing pressure to regulate the industry. This will be an ongoing battle but it is difficult to negotiate the red tape and set up in such an industry.
There is something compelling about gambling that persists down the generations. People enjoy gambling. Yes, the games people gamble on and the methods they place bets may have changed a lot but the fundamental human desire to bet is very unlikely to wane. So unlike many other industries this one is underpinned by deep seated human nature.
As we’ve mentioned many large gambling companies operate in many different countries, so if recession hits one area or one government decides to bring out some legislation this can be mitigated slightly by the operating company subsidising those problems with revenues from another market.
Reasons for Caution
We’re definitely not advocating that you go out and invest your life savings in a portfolio of gambling stocks. There is reason to be cautious.
Although regulation is a good barrier to entry, it’s also a risk. The UK government has introduced some legislation which limits the maximum stakes of fixed-odds betting terminals; this news will damage share prices, at least in the short term, and is a good example of how gambling companies are at the mercy of regulators. They have a degree of strength but if politicians want to attack them there is very little they can do.
Although we talked about gambling being embedded deep in the human psyche this doesn’t necessarily mean large gambling companies will be the ones to make profits. Software that supports gambling is becoming cheaper and more sophisticated. This means that relatively new entrants with fresh ideas like @casumocasino can come in and set up an operation far easier than they used to be able to, and as millennials start gambling more their tastes may be different and pave the way for more nimble, smaller players in the marketplace.
Gambling stocks are likely to stay strong and ride out the storms; although incumbents can come into the market they are likely to only enter in narrow verticals. As long as large companies continue investing and innovating to win and retain customers this should drive revenues, profits and therefore share price.
Looking further into the future it seems likely that some new forms of betting like eSports, virtual sports and skill games will increase, and new players specialising in those areas may build great businesses but this will probably be an increase in market rather than incumbents losing share price. If you’re thinking about investing in the sector the only question remains – which companies do you bet on?