In this article, I have evaluated entertainment stocks, DraftKings Inc. (DKNG) and International Game Technology PLC (IGT), to predict which entertainment stock is a better pick during March madness. After thoroughly evaluating these stocks, I think IGT might be a superior choice for the reasons discussed in this article.
Significant technological advancements have revolutionized how entertainment content is created, distributed, and consumed. Digital platforms, streaming services, augmented reality and virtual reality (AR&VR), and high-speed internet access have expanded the reach and convenience of entertainment, attracting a larger audience around the globe.
According to the Custom Market Insights report, the global entertainment industry is expected to grow at a CAGR of 11% by 2032.
Furthermore, the gambling industry's expansion is driven by the increasing popularity and proliferation of online platforms. The continued legalization of gambling and the allure of big payouts further shape the market’s growth trends. The global casino gambling market is expected to expand from $150.29 billion in 2024 to $191.36 billion by 2029 at a CAGR of 5%.
According to data compiled by the American Gaming Association (AGA), annual gaming revenue in the U.S. has reached a new high for the third consecutive year. Total revenue from land-based casino games, sports betting, and iGaming totaled $66.52 billion for 2023, a 10% increase from the prior record set in 2022.
Moreover, the fourth quarter of 2023 witnessed a 9.5 percent year-over-year growth as commercial gaming revenue reached $17.42 billion while generating $6.22 billion in revenue in December, a 13.3% increase year-over-year and a new single-month high. This year, the U.S. gaming sector will likely hit new records, driven by continued expansion of online gaming.
The entertainment industry’s bright prospects should benefit DNKG and IGT significantly.
DKNG surged 20.6% over the past month compared to IGT’s 16.5% decline. In addition, DKNG gained 36.9% over the past three months, while IGT plunged 22.9%.
However, here are the reasons why I think IGT might perform better in the near term:
Recent Developments
On March 7, 2024, DKNG announced plans to launch its top-rated online sportsbook in North Carolina. This announcement marks the culmination of DraftKings' continued work with stakeholders and regulatory bodies across North Carolina to provide fans with a responsible sports betting option.
With this launch, DraftKings Sportsbook will be available in 27 U.S. states and Ontario, Canada.
On March 14, 2024, IGT announced that its IGT PlayDigital iGaming content library was available in Rhode Island via the Bally Casino Rhode Island app and on BallyCasino.com. This milestone content deployment makes IGT PlayDigital one of only two suppliers to offer content in all seven U.S. online gaming jurisdictions.
Recent Financial Results
During the fiscal year that ended December 2023, DKNG’s revenue increased 63.6% year-over-year to $3.67 billion. However, the company’s loss from operations came in at $789.23 million. Also, it reported a net loss attributable to common shareholders of $802.14 million, or $1.73 per share, respectively.
IGT’s total revenue for the fourth quarter ended December 31, 2023, increased 3% year-over-year to $1.13 billion. Its operating income rose 11.3% from the year-ago value to $256 million. Also, the company’s net income came in at $27 million, compared to a net loss of $31 million in the previous-year quarter.
Past And Expected Financial Performance
Over the past three years, DKNG’s revenue has grown at a CAGR of 81.4%. In addition, the company’s total assets have increased at a CAGR of 4.7% over the same timeframe.
Street expects DKNG’s revenue to increase 31.2% for the fiscal year ending December 2024. However, the company is expected to report a loss per share of $0.29 for the first quarter (ending March 2024) and $0.20 for the fiscal year 2024.
IGT’s revenue has increased at an 11.4% CAGR over the past three years. Also, its EBITDA and levered free cash flow have grown at CAGRs of 25.8% and 103.8% over the same period, respectively.
Analysts expect IGT’s revenue to grow 1.1% year-over-year in the fiscal year ending December 2024. For the fiscal year ending December 2025, the company’s revenue and EPS are expected to increase by 3.5% and 26% from the prior year to $4.51 billion and $2.33, respectively.
Valuation
In terms of forward EV/Sales, IGT is currently trading at 2.33x, 51.8% lower than DKNG, which is trading at 4.83x. IGT’s forward EV/EBITDA multiple of 6 is lower than DKNG’s 48.09. Likewise, IGT’s forward EV/Sales of 2.33x is lower than DKNG’s 4.83x.
Thus, IGT is relatively more affordable.
Profitability
IGT’s trailing-12-month revenue is 1.2 times what DKNG generates. Moreover, IGT is more profitable, with a trailing-12-month gross profit margin of 48.89% compared to DKNG’s 37.46%. Also, IGT’s trailing-12-month EBIT margin and net income margin of 24.11% and 3.62% are higher than DKNG’s negative 21.45% and negative 21.88%, respectively.
In addition, IGT’s trailing-12-month ROE, ROA, and ROTC of 15.62%, 2.69%, and 8.15% compared to the respective industry averages of negative 74.17%, 20.75%, and 20.33%.
POWR Ratings
DKNG has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, IGT 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 Value. The stock’s forward EV/EBITDA of 46.76x is 388.2% higher than the industry average of 9.58x. Its forward Price/Cash Flow multiple of 48.74 is 371.2% higher than the industry average of 10.35x.
On the other hand, IGT has a B grade for Value. IGT’s forward EV/EBITDA of 6.02x is 37.1% lower than the industry average of 9.58x. Also, its forward Price/Cash Flow multiple of 4.67 is 54.8% lower than the industry average of 10.35.
Among the 28 stocks in the Entertainment - Casinos/Gambling industry, DKNG is ranked #25, while IGT is ranked #2.
Beyond what we’ve stated above, we have also rated both stocks for Quality, Growth, Stability, Momentum, and Sentiment. Get all DKNG ratings here. Click here to view IGT ratings.
The Winner
The entertainment industry is expanding significantly due to rapid technological innovation, the increasing popularity and proliferation of online platforms, and the continued relaxation of gambling laws. Industry players DKNG and IGT are well-positioned to benefit from the industry’s rosy prospects.
However, DKNG's poor financials, decelerating profitability, and elevated valuation make its competitor IGT the better buy.
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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IGT shares were unchanged in premarket trading Wednesday. Year-to-date, IGT has declined -21.38%, versus a 9.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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