Price Correction In The Cards For Scientific Games?

by Trefis Team
Las Vegas Sands
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The shares of Scientific Games (NASDAQ: SGMS) have nearly doubled in the past month as a result of multiple investments by institutional players. After the legalization of sports betting and the weakness in casino wagering due to the pandemic, the U.S online gaming and sports betting market is expected to reach a staggering $40 billion in the long-run. As the travel & tourism demand gradually recovers with the initiation of mass vaccination, we remain wary of further gains in SGMS stock after the recent climb. Also, Scientific Games’ Revenues observed an 18% decline during the third quarter despite sizable investments. We compare Scientific Games’ stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis to illustrate the likelihood of a correction the stock price.

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 64% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how SGMS and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Scientific Games vs S&P 500 Performance Over 2007-08 Financial Crisis

SGMS stock declined from levels of around $39 in September 2007 (pre-crisis peak) to levels of around $11 in March 2009 (as the markets bottomed out), implying SGMS stock lost 73% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $14 in early 2010 – rising by 38% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Scientific Games’ Fundamentals in Recent Years Look Strong

Scientific Games’ Revenues grew by 17% from $2.9 billion in 2016 to $3.4 billion in 2019, primarily driven by a series of acquisitions. The company’s operating margins also showed three-percentage point improvement from 13% to 16% due to lower cost of sales and depreciation charges. Thus, the EPS improved from $(2.72) in 2017 to $(1.40) in 2019. The company’s revenues and operating cash flow reduced by 22% for the first nine months of 2020. The company also has a strong cash position to weather the crisis in the current low demand environment.


Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Going by the recent rally and an overall macroeconomic weakness, we believe that a price correction is in the cards for Scientific Games stock.

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