We recently compiled a list of the 7 Best Small-Cap Casino Stocks Hedge Funds Are Buying.In this article, we are going to take a look at where Accel Entertainment, Inc. (NYSE:ACEL) stands against the other small-cap casino stocks.
Global Gambling Industry Overview
The gambling market comprises sales from gambling service-providing companies including casinos, bingo halls, online gaming terminals, and sports betting. According to the Business Research Company, the global gambling market was valued at $540.3 billion in 2023. The market is expected to grow at a compound annual growth rate of 6.6% to reach $744.8 billion by 2028.
Legalization of gambling, rapid urbanization, increased use of social media, and rising internet penetration rate are factors driving market growth. As per the report, the Asia Pacific region is the main contributor in the global betting industry accounting for more than 32.4% of the total market valuation. The Asia Pacific region is followed by North America and Europe. Looking ahead, South America and Africa are expected to be the next hot markets for gambling and casino companies. The South American region is expected to grow at a CAGR of 23.4%, whereas Africa is expected to grow at 8%. Rapid legalization and increasing disposable income in these regions contribute to the growth.
If we look at the segment-wise analysis, the lotteries segment accounts for more than 53% of the total market value and is expected to grow at the fastest rate during the forecasted period.
Emerging Trends in the Gambling Industry
With artificial intelligence and augmented reality on the boom, the gambling industry is also adapting to the trend of introducing immersive gameplay for online gambling games. Many companies are developing extended reality casino games that can be played in multiplayer modes using different devices.
Another hot trend in the industry is the wide acceptance of online casinos, where people can gamble through online games. As per the report the online gambling segment is expected to take off during the forecasted period and gain more than $124 billion. This indicates a strong market opportunity for casino companies to invest in developing interactive online casino games.
Small Caps in a Process of a Multi-Year Bottom
Tom Lee, Fundstrat Global Advisors co-founder and head of research appeared on a CNBC interview on August 16 to talk about the small-cap stocks. Tom Lee believes that the small caps are in the process of a multi-year bottom and believes that they will outperform the market in the upcoming years. While explaining his case, Tom Lee mentioned that small-cap stocks have been trading at a Forward P/E of around 10 with earnings expected to grow and if rate cuts happen during this time it will only benefit the small-cap stocks.
Our Methodology
To compile our list of the 7 best small-cap casino stocks hedge funds are buying, we used the Finviz and Yahoo Finance stock screener. We selected the Gambling industry to get a consolidated list of stocks. To get small cap stocks we set the filter between $250 million to $2 billion. Next, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q2 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A customer enjoying a game of pool on a tournament-style pool table at a Gaming Terminal establishment.
Market Capitalization as of August 21: $921.38 million
Accel Entertainment, Inc. (NYSE:ACEL) operates gaming machines and devices in bars, restaurants, and convenience stores across the United States. As of June 30, the company owned and operated more than 25,700 gaming terminals across 4,034 locations in Illinois, Montana, Nevada, and Nebraska.
Some of the main business operations of Accel Entertainment, Inc. (NYSE:ACEL) include operating gaming terminals, which are similar to slot machines, Redemption Devices that provide winnings functioning like ATMs, and Amusement Devices such as jukeboxes, dartboards, and pool tables.
Accel Entertainment, Inc. (NYSE:ACEL) is one of the best small-cap casino stocks hedge funds are buying. ACEL was held by 14 hedge funds in Q2 2024, with total stakes worth $165.95 million. Darlington Partners Capital is the top shareholder of the company with a position worth $83.1 million.
The company had a successful second quarter of 2024, with revenue growing 6% year-over-year to reach $309 million. The revenue growth was fueled by an increase in gaming terminals and locations and also based on the increase in revenue generated per location, indicating the strong market presence of Accel Entertainment, Inc. (NYSE:ACEL).
Revenue was not the only financial metric that grew during the quarter, net income also improved 46% year-over-year to reach $15 million. The profitability of the company can be estimated by adjusted EBITDA, which improved by 7% year-over-year to deliver a record $50 million in earnings.
Should you invest in Accel Entertainment, Inc. (NYSE:ACEL)? Here’s the conclusion:
We have already seen how the company delivered record revenue and earnings during its most recent quarter. What we haven’t talked about yet is its growing market presence. Accel Entertainment, Inc. (NYSE:ACEL) was able to grow its business locations by 5% and gaming terminals by 6% year-over-year indicating its growing market share in the industry.
Even if you look at the longer term, you will find that ACEL has been a success story for over the past 5 years. It has been able to grow its top line by an impressive 26% and bottom line by 32%, reinstating its long-term performance and robust fundamentals.
ACEL is also cheap at current levels. It is trading at 13 times its forward earnings, which is an 18% discount to its sector. 3 analysts have a Strong Buy rating on the stock, with their 12-month median price target of $15 presenting a 33% upside from the current level.
Overall ACEL ranks 5th on our list of the best small-cap casino stocks to buy. While we acknowledge the potential of ACEL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ACEL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
