Online Gaming Is the Growth Opportunity for the Gambling Industry

Hussain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The global gambling market has been continuously dominated by casinos and lotteries, with each category contributing 34% and 29% respectively, of the total gambling revenues in 2012. The US is still the leading nation in gambling, and is likely to remain so in the near term. However, in the long term China is expected take over as the leading gambling nation.

Driving this industry are companies that are involved in the design, manufacture, and distribution of gaming and lottery machines throughout the world. Three companies within this market, Bally Technologies (NYSE: BYI), International Game Technology (NYSE: IGT) and WMS Industries (NYSE: WMS), have concentrated primarily on the American market. These companies were hit hard by the recent economic meltdown, but now as the industry show signs of improvement and recovery, the future of these companies looks promising.

The global casino gaming industry is expected to experience a CAGR in revenues of around 9.2% per annum, with the fastest growth coming from Asia Pacific (18.3%) and Latin America (8.1%). The US market is expected to grow at 5% per annum, and the majority of the growth is expected from regional casinos, while Nevada is expected to grow slower than the US market. Within the fastest-growing Asia Pacific region, the highest growth is expected to come from China (Macau), Singapore, the Philippines, and Vietnam. Macau has already surpassed Nevada as a gambling haven, and is expected to show further growth in the future fueled by growth in per-capita incomes and tourism in the country.

Another area of interest in the global gaming industry is the advent of online gaming in recent years. The global online gaming market reached an estimated $35.8 billion in 2012 and is expected to grow further, crossing the $41 billion mark by 2015. The US market is earmarked as one of the most lucrative markets, with an estimated worth of more than $12 billion, while the European market still remains the largest. Initially online gaming was banned by US regulatory authorities, but recently a few states have adopted regulations legalizing the market. This is likely to open up the flood gates as more and more states adopt similar regulations and legalize this industry, thus giving ample opportunity to companies to achieve growth in the domestic market.

The Opportunity

International Game Technology, the largest of the three in terms of revenues, achieved a revenue growth of around 10% in the last fiscal year, showing signs of recovery after four consecutive years of decline. This four-year decline in revenues also resulted in a lower net margin, dropping well below its historic average of around 18% but recovering in recently reported results. The company was one of the first to launch online games, and also has focused on expanding its operations in the international market, particularly Asia. Now the company has become the most influential player in the global market, as well as the US, and this particular segment will help the company achieve growth in the coming years.

Bally Technologies also experienced a decline in revenues through the recession, but has achieved growth in revenues of more than 16% in the most recent fiscal year, helped by a strong growth in both the domestic and international market. Despite achieving growth, the company has failed to establish itself strongly in the international market, and continues to focus on North America. Also the company’s online operations are still relatively new, and although the company is making a great effort to enhance its user base through various agreements, it will need time to get recognition in the market. The company has continued its focus on the North American market in its most recent quarterly results, while making additional efforts to enhance its online gaming platforms in the US and the European market.

WMS Industries is the smallest of the lot, and is the only one to achieve growth in revenues over the crisis period. The company has also improved its margin over the years through controlling costs. The company spends the highest proportion of revenues in R&D, which would likely enable it to show strong growth in the coming years. Like Bally Technologies, WMS is also highly dependent on the domestic market, but the company plans to enhance its international presence in the coming years. The company is also investing heavily in its online gaming operations through various agreements to make its games available online in the US and European markets.

Conclusion

I believe there are ample opportunities for growth for all three companies, specifically in Asia and from the online gaming market in the US. Among the three, International Game Technology will outperform its peers -- it has the greatest presence in the international market, and also has the most active users of its online games and online gaming platform, particularly from North America, which saw revenues increase to $88 million in 2012 from less than $500,000 in 2011. Its strong brand name and international presence will continue to bring in additional revenues from Asian markets. For this reason I will give a buy recommendation for International Game Technology, as it offers high growth potential as well as an attractive dividend yield.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


Hussain Asghar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus