Australians love to have a punt. According to the most recent edition of the Australian Gambling Statistics, covering the 2017 financial year, Australians spent close to $23.7 billion on gambling. And while total gambling expenditure was fractionally down on the prior year, the main decrease came from casinos, where spending decreased 7.8% to $4.8 billion. However, total sports betting actually increased substantially by 15.3% to a little over $1 billion. Spending on pokies and other electronic gaming machines was also up half a percent to $12.1 billion.
The above statistics are bad news for big casino operators like Star Entertainment Group Ltd (ASX: SGR) and Crown Resorts Ltd (ASX: CWN), both of which have seen share price declines over the last 12 months. Crown in particular has also been dogged by negative press – expect the share price to continue to decline this week on the back of media reports outlining ties the company allegedly has with Asian organised crime.
But these changing trends in how Australians like to indulge in one of their favourite vices could be a boon for gaming companies with a heavy presence in sports betting and electronic gaming machines.
What companies are profiting from these changing trends?
Tabcorp Holdings Limited (ASX: TAH) is Australia’s largest diversified gambling and entertainment group. Its operations encompass lotteries and keno as well as wagering and gaming services. However, despite growing its underlying revenues by 6.1% to almost $2.8 billion for first half FY19, its share price has underperformed over the last 12 months, trading mostly sideways for the majority of the year.
The real share price gains have been made by smaller gaming companies like gambling machine manufacturer Aristocrat Leisure Limited (ASX: ALL) and lottery ticket re-seller Jumbo Interactive Ltd (ASX: JIN).
Aristocrat had a rocky end to 2018, but since January its share price has soared over 40% on the back of strong revenue and net profit after tax (NPAT) growth for first half FY19. Normalised revenues, which are adjusted for significant items, grew by 29.8% to a little over $2.1 billion, while normalised NPAT was up 14.8% to $356.5 million.
But the most astounding growth story has come from Jumbo Interactive. Its share price has risen a scarcely believable 360% over the last 12 months, surging from just over $4 a year ago to be now valued at $19.05 (as at the time of writing). In this time the company has gone from strength to strength, growing at a rate that exceeded even its own lofty expectations.
After releasing first half FY19 results in which it announced revenue growth of 57.9% to $30.5 million and total transaction value (TTV) of $147.9 million, Jumbo upgraded its full year outlook, revealing it now expected TTV uplift of about 62%, a significant increase over its previously forecasted 44%. No wonder investors have been flocking to it in droves.
Should you invest?
If you want some exposure to this industry in your portfolio, an investment in any of Tabcorp, Aristocrat or Jumbo could be right for you, depending on your risk tolerance. The Tabcorp share price has definitely underperformed over the last year, but as it is a more diversified business it carries with it less risk and should still benefit from any upside from increased national gambling expenditure.
For those targeting growth who can handle a little extra risk, either Jumbo or Aristocrat offer great potential. At current prices, I might even recommend Aristocrat over Jumbo – it might be a bit cheaper given that it’s still recovering from a correction in late 2018. If it can deliver solid results in its annual report it might offer good shorter-term growth possibilities at lower risk.
However, at the end of the day, it’s simply impossible to ignore Jumbo’s insane growth story. If it can continue to deliver the sorts of stellar results it has in the past, there’s no end to how high its share price can grow.
As it is the smallest of the gambling companies mentioned here, it is a much risker proposition. But as any gambler will tell you: no risk, no reward.
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Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited. The Motley Fool Australia has recommended Jumbo Interactive Limited. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.