The history of gambling stretches back to the Paleolithic era. This is when early humans learned to use stone tools, began painting in caves… and evidently loved to place a bet. Since that time, mankind has constantly reimagined what can be wagered on and where that betting takes place.

We are in the early stages of one such reimagining – betting online.

This article begins with a rapid tour of the modern gaming world, with stops in Las Vegas and Macau. The evolution of the casino over the past three decades underpins the constant change of this ancient pastime. It also reveals a key lesson for investors: the big gains often go to the early pioneers.

That is where we stand today. A new frontier. Online gambling. Full of potential. Fraught with risk.

But before we get there, it is important to grasp how this cycle of reimagination continually shapes what gambling can be. So, let’s take a brief step back in time. Our story begins in Las Vegas.

At 10pm on October 27, 1993, Steve Wynn pressed a small red button

A chain of explosions commenced. Just seconds prior, his voice boomed with instructions to the English ship HMS Britannia of Treasure Island Hotel and Casino:

Captain of the Britannia, are you ready sir? Prepare broadside. Ready! Aim! Fire!

Several cannon blasts from the ship coincided with a giant fireball, courtesy of 16,000 liters of aviation fuel, that engulfed the historic Dunes Hotel. Over 200,000 people looked on – some cheering, some crying – as Wynn’s button-ignited explosives turned the 23-story tower to a heaping pile of rubble in 27 seconds. As if the extravaganza risked being understated, a shower of booming fireworks illuminated the night sky in a massive display.

The spectacular demolition of the Dunes symbolized the rapid change that was occurring on the Las Vegas Strip. Just three years later, the historic Sands Hotel and Casino, a frequent Rat Pack haunt during their heyday, was imploded and demolished. Those once legendary properties were no longer competitive with the new megaresorts that were quickly rising from the desert.

The rise of megaresorts transformed Las Vegas gaming

The Mirage was a harbinger of this new era. The 3,044 room Polynesian-themed resort is presently owned and operated by MGM Resorts International (NYSE: MGM), but it was Steve Wynn’s creation. Recent years have not been kind to Wynn’s reputation. In 2018, accusations of sexual misconduct led to his resignation as CEO of Wynn Resorts, Ltd. (Nasdaq: WYNN) and as finance chairman of the Republican National Committee. A month after the resignations, he had liquidated every share of stock he owned of the company that still bears his name today.

Wynn cashed out in 2018, but in 1989 he was a rising Las Vegas titan. At the time of its opening in November of that year, the Mirage was the largest hotel in the world. It was the first Las Vegas hotel-casino built from scratch in 16 years.

Nobody had seen anything like it before. A 54-foot-tall volcano between the hotel’s entrance and the Las Vegas Boulevard sidewalk spewed steam and fire into the air every 15 minutes. Inside, a 20,000-gallon aquarium housed pygmy sharks and dazzling coral. At a time when Las Vegas entertainment consisted of has-been performers with one foot in the grave, Wynn bucked the trend. He introduced Siegfried & Roy, whose combination magic and wild animal act became the most visited show in Las Vegas.

The Mirage wasn’t just the world’s largest hotel. With construction costs of $630 million, it was also the most expensive. And in a sign of the times, it was largely funded by junk bonds.

The Mirage was the first Las Vegas casino built with money from Wall Street

And it was all made possible by Michael Milken. The junk bond king helped to finance the Mirage at a time when Wall Street was loathed to touch anything related to casinos. He even coached Wynn on how to dress when he met with Wall Street investors. He would soon thereafter go to prison for violating U.S. securities laws. But four years later, a recently paroled Milken would be at Wynn’s side for the implosion of the Dunes.

Despite his connection with Milken, Wynn didn’t become a darling of Wall Street. One of several missteps occurred during a Deutsche Bank conference where Wynn agreed to be keynote speaker. “I know all of you measure things in charts and graphs,” Wynn told the hundreds of investors in attendance, “but that’s not how I look at (the gaming) industry.”

Attendees, expecting a discussion of Mirage Resort’s financials and growth projections, were instead treated to several songs from a planned Mirage musical production Miss Spectacular over the sound system. Wynn remained on stage to sing along, eyes closed, swaying to the music. Baffled investors, thinking Wynn had lost his marbles, raced from the room to phone in their sell orders for Mirage stock. The next day’s headline in the New York Post’s Page Six gossip column read: WARBLING WYNN SHOCKS WALL ST.

But by then, the construction boom in Las Vegas was well underway. Megaresorts like Mirage and the medieval-themed Excalibur launched a $12 billion building spree on the Strip. Three super casinos were erected in 1993 alone, including the MGM Grand, which remains the largest single hotel in the United States. At it’s opening, the MGM Grand featured more amusement rides than any theme park in America except Walt Disney World.

People and their wallets began flocking to Las Vegas

Title for most rides notwithstanding, the 1990s saw Las Vegas dethrone Orlando’s Walt Disney World as the most popular tourist destination in the United States. Las Vegas became the fastest-growing city in America, its population doubling in less than 10 years.

The timing was perfect. Outdated notions of dingy casinos controlled by shady underworld characters were fading. Americans overwhelmingly considered gambling a legitimate leisure activity. This growing acceptance meant that casinos were no longer exclusively the haunt of diehard gamblers.

As noted in the 1996 annual report for Circus Circus Enterprises: “In an era when social attitudes toward play…have dramatically changed, so has the role of the casino.”

Said differently, operators branched into new areas to extract dollars from their guests’ wallets. The transformation of Las Vegas from gambling hub to entertainment destination was well under way. Before the new millennium arrived, non-gaming revenue surpassed gaming revenue for the first time.

Mega structures continued to transform the Strip. In 1998, the Bellagio and its famous Fountains opened at the same spot where the Dunes was imploded five years prior. It was the most expensive hotel that had ever been built. The following year, the $1.5 billion Venetian stood on the land once occupied by the Sands.

Las Vegas was on a roll. But the good times wouldn’t last

Las Vegas was perhaps the hardest hit city when the housing bubble burst in 2007, regularly leading the U.S. in ”underwater” mortgages for several years to come. Casinos withered as consumers and businesses cut spending while the nation plunged into the Great Recession.

The stock of Venetian-owner Las Vegas Sands (NYSE: LVS), after reaching an all-time high of $144 in 2007, fell to under $2 as the company warned investors of looming bankruptcy.

As the global economy recovered, gamblers, vacationers and conventioneers eventually returned to Las Vegas. But the casino magnates had already planned a new chapter in the story of the constantly evolving gaming business.

Macau is often described as the ”Las Vegas of the East”

That’s being modest. A Special Administrative Region of the People’s Republic of China, Macau is the most densely populated region in the world. It is the only place in China where casinos are legal. It generates over 4x-more gaming revenue than Las Vegas. But in 1999, when sovereignty of the former Portuguese colony was handed over to China, it was a sleepy backwater.

Sheldon Adelson (founder, and until his recent passing, the CEO, chairman and majority-owner of Las Vegas Sands) was the first American to the party. In 2004, he opened the first Las Vegas-style casino in Macau by way of the Sands Macao (another accepted spelling of Macau). It was an immediate hit, but he had bigger dreams. Overlooking a patch of swampland during a visit, he imagined a highway lined with luxury resort-style casinos. He wanted a Vegas-style strip in China. Five years later, the Venetian Macao opened for business on the newly created Cotai Strip as the largest casino complex in the world.

Wynn Resorts and MGM are the two other American companies that received concessions to operate casinos in what quickly became the undisputed gambling capital of the world. As cash began rolling in, investors were rewarded. From a financial crisis-low of $1.38 in March 2009, Las Vegas Sands stock pushed north of $50 before the end of 2010. Wynn Resort and MGM both achieved a more modest 8x return on their stock over the same time-period.

The modern history of gambling provides a valuable lesson for investors – the biggest gains are often made by early investors

The wealthiest players in the casino business were early investors.

Sheldon Adelson saw the potential in Macau. In 2013, just five years after Las Vegas Sands teetered on the brink of bankruptcy, Forbes ranked him the 15th richest person on the planet, with a net worth of $26.5 billion.

Kirk Kerkorian saw the potential in Las Vegas. Long before the mega casino era, he made his first investment in the desert in 1962, when for $960,000 he purchased 80 acres of land that would become the home of Caesar’s Palace. He would go on to acquire the MGM movie studio, build a casino empire, and amass a net worth of $16 billion.

Such opportunities don’t come about every day. But in a business that is constantly reinventing itself, they do occur. And right now, investors have a chance to get in on the ground floor of what is likely the next revolution in the gaming industry.

The era of legal online gambling in the United States has arrived

In a sense, it has been here since the 1990s, which gave rise to internet casinos and sports books operating offshore. These companies operated in a legal grey area (at best). Land-based gaming operators, fearful of jeopardizing their lucrative gaming licenses by trodding into murkier waters, were initially dismissive of their electronic competition and then outright opposed them.

The landscape changed when the Supreme Court legalized sports betting in the United States in 2018, leaving each state to decide whether they would expand their gambling options. Following the recent general election, more than half of U.S. states will have legalized sports betting in some form.

Given the convenience of gambling over the internet, online gaming could be phenomenally lucrative. And despite the existence of shadier operatives dating back to the 1990s, we are absolutely in the early innings of this growing trend.

Statista recently reported that “the global online gambling market is anticipated to be valued at more than $92.9 billion in 2023.” Grand View Research projects the online gambling market to be worth $127.3 billion by 2027. Considering the size of the global online gambling market was $66.7 billion in 2020, expectations point to serious growth in a relatively short period of time.

Major gaming companies have predictably changed their tune about the prospects of online gambling. MGM’s online sports book mobile app BetMGM is an official sports betting partner of the NBA, MLB, PGA Tour, and several other sports leagues.

Penn National Gaming (Nasdaq: PENN), which operates casinos and racetracks throughout the United States, have teamed with sports media company Barstool Sports. Penn is no doubt thrilled at the possibility of steering Barstool’s 60 million monthly active users and 100 million social media followers towards their online gaming platform.

Another company well-positioned for the online gambling trend is Flutter Entertainment (OTC: PDYPY). The company has extensive operations throughout the United Kingdom and Ireland. But U.S. readers are more likely to recognize FanDuel, one of their many subsidiaries. FanDuel started as a daily fantasy sports league offering cash prizes. It has expanded its offerings and now generates additional online revenue from horseracing, sports betting, and casino games.

Risks seen and unseen

These are just a few examples of how the online gambling landscape is starting to take shape. The expected growth and potential to invest near the ground floor is exciting. Exciting… but not without risk.

Gambling, online or otherwise, is highly regulated. The history of gambling regulation is one of ebbs and flows. One generation condones, the next condemns. Laws often follow suit. It is certainly the case that recent history has seen a more liberalized approach to gaming. But assuming that will continue indefinitely is falling prey to recency bias.

Consider, for a moment, how many people in your life are absolutely addicted to their smart phones. They are permanently attached to their device, scrolling with fervor, eyes focused on the screen as if the meaning of life itself will appear any moment. Now combine that with gambling addiction and a virtual casino that never leaves their side.

Gambling is a pastime for some and the ruin of others. We are largely in unchartered waters when it comes to the marriage of gambling and technology on a grand scale. The social consequences are yet to be determined. And it may be that a generation of online gambling addicts causes public sentiment to shift, swinging the pendulum of gaming regulation back to a more restrictive era.

But regulatory risk is hardly an unknown when it comes to investing in the gaming industry. What about risks that are harder to identify?

Well, almost by definition, it’s unlikely that anyone has an exhaustive list of these risks. But one interesting disruption to ponder can be glimpsed in the emergence of new operators in the online horse racing game space. These games are built on blockchain technology and use non-fungible tokens (NFTs). Players can buy, race, and even breed digital horses, which are represented by NFTs.

Digital horseracing might not topple the Kentucky Derby. But serious money is entering the space. Top steeds have been fetching six-figure sums. Big brands have taken notice. Stella Artois (manufactured by Anheuser-Busch InBev NYSE:BUD) recently partnered with digital horseracing company Zed Run. They created a set of unique horse breeds for the platform, complete with Stella Artois-themed skins.

Place your bets

Whether it’s the longevity of digital horseracing or identifying the biggest winners of the grab for online gaming market share, we’re sure to have more clarity as things unfold in the years ahead. But for those with an appetite for risk, the time to have a shot at the type of gains that reward early investors is now. As Warren Buffett has observed – you pay a very high price in the stock market for a cheery consensus.

 

Published on Advisor Perspectives.