The casino and gambling industry is set for substantial growth this year and beyond, driven by the growing penetration of online casino gaming, the easing of government regulations, and the adoption of new digital technologies.

In this article, I evaluated two casino and gambling stocks, DraftKings Inc. (DKNG) and Red Rock Resorts, Inc. (RRR), to determine which could generate better returns. 

The pandemic witnessed increased demand for online gambling platforms as people sought entertainment while adhering to social distancing measures. The casino and gambling industry, including land-based and online casino games, is poised for further growth owing to high demand, as gambling is considered one of the top entertainment and recreational activities.

The industry is also witnessing significant expansion due to the growing legal betting market. Five years after the federal ban on sports betting ended, 77% of online sports bets are now being placed through regulated operators, a notable increase from 44% in 2019, according to American Gaming Association (AGA).

Furthermore, new and advanced digital technologies such as hybrid games, Virtual Reality (VR), and Augmented Reality (AR) fuel the industry’s growth. Casino operators actively leverage these technologies to distinguish themselves and thrive in the fiercely competitive gambling industry.

According to AGA’s Commercial Gaming Revenue Tracker, the U.S. commercial gaming industry achieved an unprecedented milestone in the first quarter of 2023, generating a record-breaking $16.60 billion in revenue. This marked the eighth consecutive quarter of surpassing previous records.

Traditional brick-and-mortar casino gaming also achieved remarkable quarterly revenue of $12.30 billion, surpassing the previous record set in the third quarter of 2022. Meanwhile, Americans set a nationwide record by wagering $31.11 billion on sports, resulting in a quarterly revenue of $2.79 billion, up 70.1% year-over-year. 

AGA President and CEO Bill Miller said, “After two full years of successive growth post-COVID, the U.S. gaming industry has never been stronger.” He added, “With record growth across every gaming vertical—from brick-and-mortar casinos to mobile gaming—American adults continue to choose gaming as one of their top entertainment options.”

As per Technavio, the casino gaming market size in the United States is expected to grow at a CAGR of 4.5% by 2027.

DKNG gained 2.7% over the past month compared to RRR’s marginal decline. DKNG has gained 43.7% over the past three months, while RRR gained 10.3%. Also, DKNG gained 109.3% over the past year, while RRR climbed by 12.7%.

But which stock is a better buy now? Let’s find out.

Recent Developments

On April 24, it was reported that Pomerantz LLP, a distinguished firm specializing in corporate, securities, and antitrust class litigation, had initiated an investigation regarding claims made by DKNG’s investors.

The investigation aims to determine if DKNG and specific executives or directors participated in securities fraud or other illicit business practices. Such news could significantly impact the company’s reputation and investor confidence.

RRR has been undertaking several expansion activities to boost its revenue stream and grow its customer base. In February 2023, the company opened Wildfire Fremont. Located on Fremont Street, approximately three miles northwest of Boulder Station, the site features around 200 slot machines, a sports book, two full-service restaurants, and a bar.

Furthermore, RRR is constructing Durango, a new casino resort covering about 533,000 square feet, with 73,000 square feet dedicated to the casino. This location offers RRR a unique advantage as there are no significant competing casinos within a five-mile radius. The expected completion date for Durango is the fourth quarter of 2023.

Recent Financial Results

For the first quarter that ended March 31, 2023, DKNG’s cost of revenue increased 66.5% year-over-year to $521.74 million. Its net loss attributable to common stockholders stood at $397.15 million. Moreover, the company’s adjusted EBITDA loss came in at $221.61 million, and its adjusted loss per share stood at $0.51 for the period.

Furthermore, DKNG’s cash outflow from investing activities grew 19.5% year-over-year to $27.56 million. Additionally, its cash outflow from financing activities rose 104.4% from the prior year’s period to $25.17 million.

RRR’s net revenues increased 8% year-over-year to $433.64 million for the first quarter that ended March 31, 2023. Its operating income rose 5% from the prior year’s period to $137.28 million. In addition, the company’s adjusted EBITDA grew 8.6% year-over-year to $194.18 million.  

As of March 31, 2023, RRR’s total assets stood at $3.52 billion, compared to $3.35 billion as of December 31, 2022.

Expected Financial Performance

Analysts expect DKNG to report a loss per share of $1.82 for the fiscal year ending December 2023. The company’s revenue for the ongoing year is expected to increase 43.4% year-over-year to $3.21 billion. DKNG is expected to report a loss per share of $0.78 for the fiscal year 2024, while its revenue is expected to grow 20.9% year-over-year to $3.88 billion.

Analysts expect RRR’s EPS and revenue for the fiscal year (ending December 2023) to decrease by 40.8% and increase 2.9% year-over-year to $1.99 and $1.71 billion, respectively. In addition, the company’s EPS and revenue for the fiscal year 2024 are expected to rise 28% and 12.2% from the prior year to $2.54 and $1.92 billion, respectively.

Valuation

In terms of trailing-12-month Price/Sales, RRR is currently trading at 1.60x, 62.5% lower than DKNG, which is trading at 4.27x. Likewise, RRR’s trailing-12-month EV/Sales multiple of 3.34 is 25.6% lower than DKNG’s 4.49.

Thus, RRR is relatively more affordable.

Profitability

DKNG’s trailing-12-month revenue is 1.5 times what RRR generates. However, RRR is more profitable, with a trailing-12-month gross profit margin of 64.56% compared to DKNG’s 34.72%. In addition, RRR’s trailing-12-month EBITDA margin of 42.43% compares to DKNG’s negative 45.64%.

Furthermore, RRR’s trailing-12-month ROCE, ROTA, and ROTC of 402.94%, 16.33%, and 12.16% are significantly higher than DKNG’s negative 108.80%, 32.17%, and 33.93%, respectively.

POWR Ratings

DKNG has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, RRR has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DKNG has a D grade for Quality, in sync with its lower-than-industry profitability. DKNG’s trailing-12-month EBITDA margin of negative 45.64% compares to the 10.88% industry average.

RRR, on the contrary, has a B grade for Quality, in sync with its relatively higher profitability. RRR has a trailing-12-month EBITDA margin of 42.43%, 290% higher than the 10.88% industry average.

Of the 28 stocks in the Entertainment – Casinos/Gambling industry, DKNG is ranked #27, while RRR is ranked #12.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view DKNG Ratings.  Get all RRR ratings here.

The Winner

The casino and gambling industry is well-placed for significant growth and expansion in the foreseeable future, driven by the sustained demand for traditional and online casino gaming, the legalization of sports betting, and the incorporation of advanced technologies. Therefore, prominent casino and gambling companies DKNG and RRR should benefit from the industry tailwinds.

However, considering DKNG’s relatively weak financial performance, low profitability, and higher valuation, its competitor, RRR, could be a better buy now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Entertainment – Casinos/Gambling industry here.

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DKNG shares were trading at $24.70 per share on Wednesday afternoon, down $0.06 (-0.24%). Year-to-date, DKNG has gained 116.86%, versus a 14.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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