Churchill Downs, Inc. (NASDAQ:CHDN) is a publicly traded company that runs race tracks (including its namesake track), casinos, and online betting.
It’s the home of the world-famous Kentucky Derby (known only as Derby to fans), and despite having problems getting fans at live events in a post-coronavirus world, the company is experiencing record-high market values. This is largely thanks to the company’s aggressive digital expansion, pushing for clearance in each individual state for its online sports betting.
These gains have analysts and investors looking at the stock wondering – is Churchill stock a buy?
The company’s stock gained over 200 percent since the start of the pandemic, easily outpacing the S&P 500.
Much of this is due to the federal stimulus packages that allowed people to continue spending. It’s unclear how well the company’s business plan will do in the face of a pending recession in 2021.
According to government studies, the only recession-proof business in the gambling industry is the lottery, which puts the investment at high risk. So, what stakes you’re really gambling with by investing in CHDN stock.
Churchill Downs Derby Bets Top $200,000,000
Churchill Downs is a historic horse racetrack with thoroughbred racing and live events featured in Louisville, Kentucky.
The Derby itself is a two-week festival capped by a “Run for the Roses,” which is known as the most exciting two minutes in sports.
The event draws millions of viewers from around the world, with around $200 million in bets being placed for this one event alone. It’s steeped in tradition, including the lush blanket of red roses awarded to the winner. Of course, one event isn’t enough to create a thriving business, and the parent company soon expanded.
It continued buying other racetracks to benefit from other racing events in the Triple Crown and more. Soon, it had partnerships for wagering services like TwinSpires and BetAmerica, casinos across the country, and more. It also acquired Big Fish Games, a casual game developer valued at $880 million in 2014.
It later flipped the company in 2018 for $990 million and remains the leading horse, so to speak, in the horseracing industry.
CHDN also held other gambling-related holdings that helped it generate steady profits in 2020, despite an initial hit from the coronavirus.
So, should you buy into the company while it’s already at a high?
Is Churchill Downs Stock a Buy?
Churchill Downs has a market cap nearing $7 billion in the fourth quarter of 2020. Share prices are trading in the $150-200 range, which is where it was heading before COVID-19 hit and the stock plummeted to a low of $52.90. It since more than tripled in value, giving investors confidence that it can continue outperforming the market.
The company only brought in $120.03 million in the second quarter of 2020, compared to $469.85 million in the same quarter the prior year.
This is because the coronavirus delayed the Derby from its normal spring running until September.
Investors who recommend to buy are doing so in the hopes that the November 4, 2020 earnings statement show a huge spike in revenue from the event. That’s going to be a tough sell, considering the TV ratings from NBC Sports showed only 8.3 million viewers, done almost 50 percent from the 16.3 million people who watched in 2019.
In addition, the race was run without fans in the stands, which really limited the company’s ability to make money from the live event.
Its online betting could still be enough to create a win, but the first half of 2020’s revenue of $371.48 million is a far cry from the $720.42 million earned in 2020.
That means this is a risky stock that could very well go down in the next year. Let’s discuss those risks.
Risks of Buying Churchill Downs Stock
The biggest risk to Churchill Downs is that people stop gambling, besides the lottery. Should the economy fall into recession after the government’s economic stimulus wears off, this company will experience problems.
It’s very likely that its earning statements will show the Derby only brought Q3 earnings up to last year’s level for the same quarter, which would still leave the annual total still over $300 million short of last year’s.
It’s likely to continue underperforming until next year’s Derby, assuming that’s a live event.
Casinos are also struggling with only being able to open at half capacity in states where they’re allowed to reopen at all. Because of this, Churchill Downs will need to lean on its online gambling business, and it has a lot of competition from major players in the realm of traditional gambling.
Can Churchill Downs Competitors Win?
Churchill Downs has competitors in racing, but its Kentucky Derby is too engrained in the culture to go away anytime soon. Where it’s really fighting competition is in its digital gambling efforts.
Here, it’s competing with the likes of International Game Technology, MGM Resorts International, Caesars Entertainment, and more.
As many of these companies are already struggling to maintain revenues in the aftermath of global coronavirus lockdowns, the competition will be fierce.
There’s also rumors of major buyouts happening in the horseracing industry. There’s a possibility that Churchill Downs will be involved in mergers and acquisitions (possibly even being bought out itself). This exit strategy could drastically change the fate of investors.
Is Churchill Downs Stock a Buy? The Bottom Line
Churchill Downs is a historic racetrack that grew to become the largest company in the American horseracing industry. It since expanded into casinos and online gambling, moves that helped it stay in business during the covid-19 crisis.
Investor interest is piling on the company, and it could be overvalued, as its reported revenue in the first half of 2020 is half of the prior year’s, and its delayed Kentucky Derby is unlikely to make up for lost revenue.
As the economy enters recession next year, there’s a good chance Churchill Down will underperform the general market on its own. Its best bet is to acquire other companies to gain more digital revenue – otherwise it may need to be bought out itself. Invest with caution, as it’s a gamble in more ways than one.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.