Golden Entertainment’s Strategic Growth And Undervaluation (NASDAQ:GDEN)

gilaxia/E+ via Getty Images Thesis Golden Entertainment (NASDAQ:GDEN) is positioned in a way for future growth because of its strategic attempts and undervalued stock price. By growing its tavern portfolio and launching new projects like Atomic Golf, I believe the organization could improve revenue and profitability. This would make it a nice investment opportunity. Introduction Golden Entertainment runs entertainment and gaming businesses. They manage casinos, taverns, and gaming route operations. They run places where people can play casino games, visit bars, and use slot machines in various locations. You can think of restaurants and convenience stores. Their operations are mostly based in Nevada and Montana. Financial Performance Quarter Ended 2023-03-31 2023-06-30 2023-09-30 2023-12-31 2024-03-31 Revenue 278.05 286.68 257.73 230.69 174.05 Revenue Growth (YoY) 1.61% -0.93% -7.62% -17.52% -37.40% Cost of Revenue 159.56 162.29 149.86 128.31 81.38 Gross Profit 118.49 124.39 107.87 102.39 92.67 Selling, General & Admin 62.04 67.09 67.73 58.71 59.99 Operating Expenses 85.84 88.65 -215.84 95.27 12.52 Operating Income 32.65 35.74 323.71 7.12 80.14 Other Expense / Income – 0.41 – 1.33 – Net Income 11.63 12.28 241.22 -9.37 41.96 Gross Margin 42.62% 43.39% 41.85% 44.38% 53.24% Operating Margin 11.74% 12.47% 125.60% 3.08% 46.05% Profit Margin 4.18% 4.28% 93.59% -4.06% 24.11% Click to enlarge Source: Seeking Alpha (Retrieved on 06-04-2024). Financials in millions USD. I observe two important trends in Golden Entertainment’s financial performance for the period ending March 31, 2024: The revenue has steadily declined from $278.05 million in Q1 2023 to $174.05 million in Q1 2024. Year-over-year revenue growth shows negative figures, reaching -37.40% by Q1 2024. I believe this decline is mostly caused by Golden Entertainment’s decision to streamline its operations by selling several of its assets. According to iGaming Business, In 2023, the organization sold the Rocky Gap Casino Resort and its distributed gaming businesses in Nevada and Montana. This led to a reduction in its gaming revenue. These sales caused a great drop in the organization’s revenue as the operational portfolio shrank, even with generating considerable liquidity from these transactions I noticed quite a variation in the operating and profit margins. The operating margin spiked dramatically to 125.60% in Q3 2023 before dropping to 3.08% in Q4 2023, then rising again to 46.05% in Q1 2024. Similarly, the profit margin surged to 93.59% in Q3 2023, fell to -4.06% in Q4 2023, and increased to 24.11% in Q1 2024. I believe these fluctuations are mainly because of the one-time gains from the asset sales, which temporarily improved the margins. The sale of assets caused huge gains that inflated the operating and profit margins in Q3 2023. However, the absence of revenue from these sold assets caused a sharp decline in Q4 2023. The recovery in Q1 2024 shows the organization’s adjusted operations and a more focused portfolio on its core assets, leading to more stable profit margins going forward. Opportunities Using the earnings call Q1 2024, I will discuss some of the highlighted opportunities: According to the earnings call, Atomic Golf is an $80 million project that opened at the end of the quarter. This entertainment place gives the opportunity to a special golfing experience. It combines modern technology with a fun atmosphere. The project is not directly funded by Golden Entertainment, but it is expected to help with its revenue through a revenue share agreement. This new entertainment experience has the goal to help attract both visitors and locals. I believe that this could help increase foot traffic to the STRAT, improve the overall guest experience, as well as grow occupancy rates. Through servicing a special activity that attracts a wider audience, Atomic Golf could attract more visitors to the property. This should help with higher revenues from both gaming and non-gaming activities. The increased foot traffic and better guest experience are also estimated to improve midweek occupancy rates. The occupancy rates are an important component for growing EBITDA at the STRAT. Golden Entertainment has just acquired more taverns, boosting the total to 71. They’re planning to open the 72nd by the end of Q2 and aim to exceed 90 locations in the coming years. I see this expansion includes not only acquiring new taverns. But I also see developing new opportunities to strategically enhance their reach. Expanding the tavern portfolio gives more points of contact with customers, increasing revenue from food, drinks, and gaming. A larger footprint and a recognized brand help in maintaining a strong market position and drive steady growth. Golden Entertainment can capture more market share and create a stronger revenue stream from its tavern operations by increasing the number of locations (iGaming Business)​​ (CasinoBeats)​. Challenges Golden Entertainment is up against numerous hurdles that could affect its business operations and financial outcomes. I think the Nevada gaming scene is fiercely competitive, with many operators using aggressive marketing tactics and innovative products to grab market share. This fierce competition can hit Golden Entertainment’s revenue and market share hard. This will especially hit hard among its low- and mid-tier customer groups. Rivals often roll out attractive promotions, loyalty schemes, and incentives. This, in my view, makes it harder for Golden Entertainment to keep its customers unless it can match or outdo these offers, which could mean higher marketing and promotional expenses. In such a crowded market, keeping customer loyalty is tough. Golden Entertainment must continuously come up with new and better service offerings to stand out from the crowd, a task that demands a lot of resources and money (iGaming Business)​​ (CasinoBeats)​. New competitors entering the Las Vegas market or existing ones expanding their operations also pose a big challenge. New entrants can take away market share which will be pushing current players to improve their services and facilities to stay in the game. Established rivals growing their presence in Las Vegas can grab market share that might otherwise go to Golden Entertainment. This does not only mean new casinos but also entertainment spots and hospitality services that would offer a better overall experience for their customers. I see that dealing with the regulatory hurdles of opening new locations and expanding existing ones is another major challenge. New players who can successfully navigate these regulations can quickly turn into tough competitors (CasinoBeats). Valuation Gross Margin P/S ratio TTM P/E Ratio TTM Growth revenue Growth EPS Revenue growth NY (analyst estimate) Earnings growth NY (analyst estimate) Golden Entertainment 35% 1.09 4.47 -6% 211% 2% -33% Industry 39% 1.98 6.09 11% 28% 3% 4% Click to enlarge Source: Yahoo Finance. The industry medians are calculated with data available from 4 small market cap companies in the Resorts & Casinos industry. Data is retrieved on 06-04-2024. Golden Entertainment’s gross margin is at 35%. This value is under the industry median of 39%. This shows that their cost management isn’t as efficient as some of their peers. The company’s price-to-sales (P/S) ratio is 1.09. This is much lower than the industry median of 1.98. I believe that this suggests the market doesn’t value their revenue as highly. Also, Golden Entertainment’s price-to-earnings (P/E) ratio is 4.47, below the industry median of 6.09. So when you see this, these numbers indicate that Golden Entertainment is currently undervalued when compared to its industry peers. This is probably because of recent drops in revenue and some strategic asset sales. Given the opportunities from new projects like Atomic Golf and the expansion of the Nevada tavern portfolio, along with the hurdles from the fiercely competitive Nevada gaming market, I reckon a more conservative growth rate estimate for Golden Entertainment would be prudent, yet still optimistic given the new ventures. I’m thinking of a 4% revenue growth rate and a 10% earnings growth rate for the coming year. With a 10% earnings growth rate, slightly below the industry estimate of 4%, a fair P/E ratio might edge closer to the industry median but stay a bit lower due to market caution. Maybe around 5.5 for the P/E ratio. And with a 4% revenue growth rate, which is above the industry median estimate of 3%, the P/S ratio should show some improvement, possibly moving nearer to the industry median. So, a fair P/S ratio might be around 1.5. If Golden Entertainment can effectively capitalize on their new projects and tackle the competitive challenges, their stock might see an upward adjustment in the market. Conclusion Even with recent setbacks, I’m feeling optimistic about Golden Entertainment’s stock. Their strategies such as broadening the tavern portfolio and introducing the Atomic Golf project give me promising feelings about the outcome for future expansion. At the moment, the low P/S and P/E ratios offer an attractive entry point for investors. I think Golden Entertainment’s stock will see substantial gains as these initiatives begin generating income and the company exploits its competitive edges.

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