Caesars was pounded by investors and analysts over its third quarter results in Las Vegas, but executives struck an optimistic tone around the company’s digital momentum.
Caesars shares opened 7.7% lower Wednesday than Tuesday’s close of $22.09, after an 11.2% drop in companywide EBITDA on flat revenue. Digital EBITDA was $28 million, down 46.2% from last year on well-documented NFL betting softness in September, according to the quarterly report.
Management commentary on Tuesday’s call remained bullish on digital, as COO Anthony Carano noted strong volume growth for both sports betting and online casino.
“We’re happy with where we are,” CEO Tom Reeg added. “Margin-wise, happy to see us growing handle. iGaming continues to perform quite well. So all of our goals remain in front of us in terms of what we’ve laid out for digital and fully expect that we’ll get there.”
Targets down, confidence up
Analysts largely cut their price targets, but held positive outlooks despite the weak quarter.
Steven Pizzella of Deutsche Bank lowered his target to $36, down from $50, after cutting estimates but maintained his buy rating and positivity around the stock.
“With shares approximately 50% off the highs, Las Vegas headwinds reasonably well known, and a compelling valuation, in our view, we see a favorable setup for CZR, as Las Vegas goes from bad to less bad, with fundamental drivers to unlock value …,” Pizzella said.
Barry Jonas of Truist held the same sentiment as he dropped his target to $30, down from $32, while remaining buy-rated on CZR.
“CZR has been a challenging stock to own, but we see risk reward skewed positive at this valuation, esp. with the prospect of improving Vegas trends, and Regional/Digital growth,” Jonas noted.
Shareholder value coming, eventually
Steven Wieczynski of Stifel dropped his target to $37, from $42, but kept his buy rating. He noted investors are probably more confused on what to do with shares after the call than they were before and there is still not enough going for the stock for some other investors to buy in.
“While we might sound bearish, we are probably just more frustrated/exhausted,” Wieczynski said. “Ultimately, we do believe in this management team and believe they will eventually create significant shareholder value. We just aren’t certain the time frame anymore (which is the opaquest thing an analyst can say).
” … We have slightly lowered our estimates to account for prolonged leisure softness across the LV Strip. We are probably being overly cautious at this point but believe until estimates get to a realistic level, investor interest will remain subdued.”
Digital run-rate dependent on results
Reeg confirmed that Caesars still expects to hit its run-rate of $500 million in digital EBITDA during the fourth quarter, but hedged that confidence with a comment on current trading.
“Yes. The big swing factor there, David, is game outcomes,” Reeg said. “Obviously, we had a third quarter that wasn’t great. We’re four of 13 weekends into the fourth quarter, those outcomes have not gotten substantially better.
“So our hold for the first four weekends was above last year’s hold, but below our budgeted hold. So that will have an impact on where the fourth quarter comes in. As you have seen, sports outcomes are particularly volatile, so I wouldn’t take four of 13, whether it’s positive or negative as determinative at this point, but that’s where we stand as we sit here today.”
Caesars upped acquisition spend in Q3
On top of bad September NFL results, Digital’s adjusted EBITDA was hit by higher costs in the third quarter as well.
Caesars called out $195 million in “other” quarterly expenses for the segment, a 10.2% increase over last year. Included in the catch-all category is marketing and advertising expenses, which President of Caesars Digital Eric Hession said was spent on what should be quality online casino customers.
“It was spend that, as we went through the quarter, we steadily increased heading into football and heading into a strong acquisition period for the iCasino side,” Hession said. “We acquired a lot more customers during the period as a result of that spend.
“We believe that, over time, that spend will come to fruition with the lifetime values of the customers. However, in the period in which we spent it, it shows up as a drag.”
Caesars also saw digital gaming taxes jump 18.9% to $88 million in the quarter.
No impact from predictions
Prediction markets have had no measurable impact on Caesars’ business so far, though the company is watching legal developments closely.
“I suspect most of the volume that they’re generating is coming from states that don’t have legalized sports betting,” Hession said. “And then there’s probably some on the margin that is coming from the legalized states that we might not have been able to access anyway, like 18- to 21-year olds and that type of customer demographics.”
Hession noted the company is taking a wait-and-see approach to be ready to move “if there’s a legalization definition in either direction.”
“We will not put any of our licenses at risk,” Reeg added. “We believe what’s happening in prediction markets is sports gambling. If there’s a path that develops where we can participate in a way that doesn’t put licenses at risk, you should expect we would be, we are preparing and would be prepared to go down that path, but we’re watching it the same as you are.”
Predicting a Supreme Court ruling
Reeg said he wishes there would be some clarity around prediction markets in the near term, but he does not expect it.
“It seems like the path this is going to go on will ultimately be decided at the court level, ultimately, the Supreme Court level,” Reeg said. “And I’d expect that there’s going to be rulings that go in both directions along the way.
“And ultimately, if something gets appealed up to the Supreme Court, there is a state rights versus federal rights question here that’s larger than just sports betting that might argue that the court takes it up relatively quickly. There’s also the argument there’s a lot of stuff bubbling up to the Supreme Court and maybe this gets pushed back further than we’d like.
“But I would expect we’re going to be in this cloudy period for quite some time.”
Digital Q3 by the numbers
Caesars Digital saw net revenue up 3% for the third quarter, driven by a 24.4% increase in online casino handle to $4.761 billion, according to its 10-Q. Hold rose 0.1 percentage points to 3.6%.
Sports betting handle grew 6% compared to last year to $2.476 billion. Hold fell 0.8 percentage points to 7.8%.
Average revenue per monthly unique payer fell 3% to $200 during the quarter, but monthly unique payers jumped 15% to 458,434.
Excluded from those sports betting totals is $193 million in handle from “select wholly-owned and third-party operations for which Caesars Digital provides services and we receive all, or a share of, the net profits.” Hold from those operations was 11% compared to 12.7% last year.
