Caesars Dealing Investors a Winning Hand of Digital and Physical Gaming Demand

With Caesars CZR having already announced fourth-quarter results in January (roughly in line with our forecast), the key takeaways from the call were digital segment EBITDA reaching its 50% return on investment target in 2025, and there being no signs of demand slowdown so far in 2023 in its U.S. casino businesses. We think shares have been unduly held back by cyclical and balance sheet cost concerns. We maintain our view that Caesars’ revenue will grow further in 2023, driven by the human-ingrained desire for travel, shift to service consumption, remote work flexibility, digital business strength, and a strong event calendar in Las Vegas. We plan to increase Caesars’ $80 fair value estimate around a low-single-digit percentage and think investors should consider dealing themselves shares.

The major news from the earnings call was that no-moat Caesars believes their digital segment can achieve EBITDA of around $500 million in 2025, ahead of our $200 million forecast. Caesars’ industry-leading loyalty membership of over 60 million and various enhancements to its digital offering (plans to launch new iGaming content and a separate mobile app, along with improved sports content and placement within its mobile app) are pushing the profitability curve forward. This positive digital position was evident already throughout 2022, where EBITDA losses improved each quarter, with revenue up 100% and promotion expense down 43% in the fourth quarter. We now think Caesars’ digital business can print around 30% EBITDA margins in 2025 versus the mid-20s we had expected by 2027.

Caesars’ Las Vegas and regional casino demand remains strong. In fact, fourth-quarter Vegas occupancy of 95% recovered to 2019′s level for the first time, and the company expects demand to remain near full levels in 2023, with potential for room rates to gravitate higher, given a higher group to leisure mix. Overall, we remain comfortable with Vegas revenue growing at least 3% in 2023.