The expected reopening of casinos in Las Vegas, Nevada, as announced in a May 26 press release issued by the Office of Governor Steve Sisolak, could be just the boost that gaming companies like Everi Holdings (NYSE:EVRI) were waiting for. After the stomach-churning drop from near $15 to near $1.50 in a matter of a month, EVRI has been gaining ground on the back of several initiatives that include borrowing $125 million against its credit facility to fight the impact of COVID-19 on the business, as well as the company’s contactless and cashless FinTech solutions that are well-aligned toward social distancing compliance.
The governor’s announcement has brought new hope to Nevada’s gaming industry, and companies like Everi that serve the state’s casino operators by providing machines as well as technology solutions stand to gain as casinos start opening their doors to the public. Against that positive backdrop, EVRI could see fresh momentum as casino doors reopen to an expectant public and an anxious industry.
Nevada’s gaming industry took a big hit when stay-at-home directives were first announced. For FY-2019, Everi reported significant growth across revenue and profitability metrics, growing revenue by nearly 14% and expanding net income by over 33%. However, at the time of the 2019 Annual Report, which was released in early March, EVRI was already sliding down toward its YTD low.
As of this writing, the stock is trending upward and trading near the $6 mark. If Everi’s customers are able to maintain the “new normal” in alignment with directives from the governor, we could see significant movement in EVRI. Let’s look at the opportunities and risks involved.
Source: 2019 Annual Report (10-K) – figures in ‘000s except per share data
Everi’s performance in 2019 reflects a solid bounce-back from the pre-2018 days of year-over-year net losses despite growing revenues. I believe there’s ample opportunity for the company to execute a strong comeback as Nevada reopens its gaming industry in a phased manner.
One of the strongest drivers of Everi’s turnaround in the era of post-COVID-19 will be its technology capabilities that facilitate self-service, contactless, and cashless transactions. The Nevada Gaming Control Board has issued health and safety policies to gaming licensees around the reopenings, including the availability of face coverings, on-site medical personnel, designated areas for COVID-19 testing, and so on, and this is likely to boost the need for gaming operators to comply with social distancing norms through the use of FinTech products that facilitate a zero-contact environment.
As such, while Everi’s Games segment revenues could show modest growth, it is likely to be slower than the growth in FinTech revenues on the back of its customers prioritizing contactless solutions for their operations. FinTech revenues could ramp up faster as gaming licensees seek to save cash by deferring hardware replacements in favor of deploying solutions that are in line with the Gaming Control Board’s health and safety directives.
While opportunities lay waiting on the horizon, the risks of investing in EVRI – and the casino industry, in general, following stay-at-home order relaxations – are many. Their Risk Factors section in the 10-K filing alone is 16 pages long and enumerates the many ways in which the business and the stock could fail. The short-term risks, however, are around how the reopenings will be handled, if gaming licensees will be able to comply with the strict social distancing regulations, and whether the June 4 date will, in fact, represent the beginning of the journey back to normalcy as far as the gaming industry in Nevada is concerned.
There are also other risks, such as patron traffic being limited by health concerns, capacity utilization challenges because of distancing guidelines, low availability of disposable income, and the growing popularity of online casinos as safer alternatives to physical locations.
Positive Revenue History and Outlook
It should be mentioned that growth data for Las Vegas gaming licensees until the end of 2019 showed upward trends for several years despite the existence of pre-COVID-19 challenges, such as online casino growth. According to data from the Nevada Gaming Control Board for 2017, 2018, and 2019, taxable revenue reported by all non-restricted gaming locations statewide grew by 2.8%, 1.5%, and 3.2% over the respective prior years.
Inasmuch as online options are taking away growth from physical locations, casinos and other gaming operators in Nevada don’t appear to be showing negative revenue growth as a group. And that positive trend adds some hope to offline gaming and the companies that depend on it for their revenues.
In related news, stocks of several Nevada gaming operators have been given a boost after the June 4 reopening date was announced by the governor. That’s a sign that investors are looking on the bright side and generating some demand around these stocks.
In terms of valuation, the stock appears to be more expensive than its peers. However, a look at comparative growth histories over 2019 and growth prospects for 2020 shows that Everi is the only one of its peers of which the market expects positive revenue growth.
The company’s performance in 2019 was clearly a stand-out one, and even the year ahead indicates stronger-than-average revenue growth in this peer group.
In summary, while the risks are certainly to be acknowledged, it still appears to be a buy from a balanced viewpoint. Nevertheless, be ready to hold this stock for at least a few years in order to see significant capital appreciation. Unfortunately, there are no dividends to fall back on so it could end up being a waiting game to see how the casino industry fares overall and how Everi is able to make its mark in a uniquely challenging post-COVID-19 environment.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.