Why Caesars’ Digital Arm May Be the Gaming Giant’s Best-Kept Secret

It’s not often that a company with the scale and history of Caesars Entertainment goes relatively unnoticed by Wall Street while quietly incubating a high-growth opportunity. The gambling and hospitality giant, which got its start in Reno back in 1937, is better known for iconic casinos and resorts than digital gaming platforms. Yet beneath the surface, the company’s digital segment is now emerging as a major new growth driver that could catapult revenues and profits to levels few observers are anticipating.

Most eyes remain glued on the big technology names powering the S&P 500’s 29% rise this year and the NASDAQ Composite’s even more impressive 37% surge. With that kind of performance, attention naturally tilts toward the flashy “Magnificent Seven” stocks that have captured the headlines.

But as the market narrows its focus on high-flying tech giants, Caesars (NASDAQ:CZR) has been sharpening a tool that might give it an outsized share of future returns. Just as Amazon’s AWS transformed its low-margin retail business more than a decade ago, Caesars Entertainment’s digital arm is on track to reshape the company’s core earnings profile in a similarly dramatic way.

In the most recent quarter, Caesars Entertainment surprised many by revealing a digital segment that generated net revenues up 41% year-over-year, rising from $215 million to $303 million. Even more compelling, the segment’s EBITDA soared from a modest $2 million to $52 million over the same period.

Those are no small feats, especially when they take shape in a company whose core divisions span everything from world-class Las Vegas hospitality to regional gaming destinations. Given the scale of Caesars—$2.9 billion in quarterly net revenues—the digital piece still accounts for just about 10.5% of total sales, which means the broader market may still be overlooking its significance.

Despite some nagging factors, including a hefty debt load of $12.7 billion offset by just $802 million in cash, it’s clear that this next-generation growth lever could begin to shift the valuation conversation if the trend continues.

Caesars is trading at just 0.7x sales and about 1.9x book value, ratios that look suspiciously low for a company that may be on the verge of unlocking a valuable digital growth narrative. If the segment’s stunning momentum persists, the top line and bottom line may soon start to break free from the pattern of flat quarterly revenues that have lulled investors into complacency.

In Q3, Caesars’ same-store adjusted EBITDA came in at $1.0 billion which clearly spotlights how management can churn out strong underlying cash flow even before investors fully appreciate its digital potential. This stable baseline comes as total net revenues reached $2.9 billion, only a modest 2.6% same-store decline versus the prior-year period, according to the company’s latest earnings release.

With the digital segment now achieving a record-breaking quarterly adjusted EBITDA, it may be just a matter of time before these digital gains are spotted and are seen as combatting the decline in legacy segments. If so, they have the very real potential to reset the growth narrative around Caesars entirely.

Digging Deeper into Digital Growth

Not long ago, Caesars Entertainment’s digital ambitions resembled a low-margin experiment rather than a credible path to profitability. But times have changed rapidly.

The digital gaming and online sports betting offerings now stand as a vital complement to the core casino business, especially as consumers show increasing comfort with wagering from anywhere and at any time. The story brings to mind the Amazon/Walmart dichotomy of the early 2010s.

Walmart was busy refining its brick-and-mortar empire, while Amazon’s online marketplace seemed low-margin and impractical. Then Amazon Web Services exploded onto the scene, and suddenly Amazon’s hidden profit engine dwarfed the old assumptions.

Caesars’ digital engine, though still small, is now producing the kind of results that no serious investor should ignore. The segment’s 40.9% year-over-year increase in net revenues for the third quarter of 2024 is just the latest piece of evidence. During the nine months ended September 30, 2024, Caesars’ digital segment posted $861 million in net revenues, compared to $669 million in the same period the year prior—an increase of more than 28%.

Adjusted EBITDA for digital soared to $97 million year-to-date from just $9 million the year before, an order-of-magnitude improvement that suggests scaling efficiencies are taking hold. This is not just a flash in the pan; it’s the product of a deliberate effort to capitalize on the rapid expansion of iGaming and mobile sports betting across regulated markets.

Unveiling the Financials Behind the Scenes

Steady top-line results can sometimes conceal the real changes occurring within a company. Caesars, for several quarters now, has reported roughly $2.8 to $3.0 billion in total quarterly revenue—a stable figure that has kept it off growth investors’ radars. Yet the details of the 2024 third-quarter report suggest a company in transition.

Las Vegas revenues came in at $1.06 billion, down from $1.12 billion last year, reflecting a 1.3% same-store decline. Regional properties posted $1.45 billion, an about 7.6% dip year-over-year due to competition and temporary construction-related disruptions.

Those figures might initially seem discouraging, but remember that Las Vegas and regional gaming are mature markets with limited capacity for explosive organic growth. The story is not about the older segments, but about how the newer digital business can reinvigorate the whole enterprise.

Caesars is maintaining solid core EBITDA at about $1.0 billion on a same-store basis. The digital unit’s contribution to that figure is increasingly meaningful. The underlying economics of digital gaming and sports betting—lighter physical infrastructure, scalable technology, and potentially lower incremental customer acquisition costs—suggest that profits in the digital segment can grow faster than revenues over time.

Once the digital arm attains sufficient scale, it has the very real potential to pull the entire company’s margin profile upward, much like AWS did for Amazon in years past. If top-line growth in digital continues at this pace, investors can expect to see it move the needle on total revenue and EBITDA sooner than many anticipate.

Throughout the third quarter of 2024, Caesars posted GAAP net revenues of $2.9 billion and a same-store adjusted EBITDA of $1.0 billion, both relatively stable outcomes in line with recent quarters. Although Las Vegas dipped slightly from $1.12 billion to $1.06 billion, and regional properties declined from $1.57 billion to $1.45 billion year-over-year, the main difference-maker was the digital segment’s leap to $303 million in revenues—a 40.9% jump.

For the nine-month period, total net revenues were $8.45 billion on a same-store basis, down just 1.3% compared to the year-ago period’s $8.56 billion. Within those stable numbers lies a tale of shifting composition: as digital claims a larger slice of the revenue pie, the potential for accelerated bottom-line growth is increasing.

Management noted that the digital business set an all-time quarterly record for adjusted EBITDA at $52 million, which is all the more notable against a backdrop of steady or modestly declining revenue at legacy properties. If these trends persist, long-term shareholders may soon see revenue mix tilt decisively toward higher-margin, technology-driven streams of income.

Debt, Valuation, and the Path Forward

While there’s lots to like about Caesars Entertainment, the $12.7 billion in debt on its balance sheet contrasted against just $802 million in cash screams watch out. With that said, management is actively managing its balance sheet and announced a $1.1 billion senior unsecured refinancing, which should result in meaningful interest expense savings in 2025.

Along with other 2024 re-financings, management expects lower interest burdens going forward that should further free up cash flows into reinvestment.

Clearly, the market seems to be pricing Caesars as if it were a low-growth or even a no-growth entity because it’s trading at roughly 0.7x sales and around 1.9x book value. When compared to many large-cap equities, those ratios appear almost too cheap for a company on the cusp of an earnings metamorphosis.

As more states legalize online betting and as the digital segment’s EBITDA builds from $52 million toward more substantial triple-digit figures, investors are likely to see that the shares are undervalued.

So, will Caesars stock recover? Analysts currently place fair value at around $52.97 per share but that may be on the low-end if the digital unit can keep positing stunning growth figures as it did last quarter.

The Undiscovered Diamond

Caesars Entertainment today may not command the kind of feverish enthusiasm that Big Tech or AI-driven enterprises garner. But tucked within its sprawling ecosystem of casinos, hotels, and entertainment venues is a digital segment that is evolving with remarkable speed and efficiency.

The parallels to Amazon’s early AWS days are not merely marketing spin. AWS turned heads when it began pumping out profits at a time when Amazon’s online retail margins looked meager. Caesars Digital is doing something quite similar—contributing a swelling EBITDA figure that could reshape investor perceptions of what Caesars can achieve.

Add in the fact that revenues from older segments remain stable and predictable, the refinancing plan is poised to reduce interest expense, and the company’s valuation metrics remain subdued. Layer on the catalysts of regulatory expansion, improving brand traction in digital markets, and the possibility of margin expansion, and the investment thesis becomes compelling.

The moment when Wall Street fully grasps the significance of the digital segment’s trajectory could come sooner than anyone expects. At that point, the market’s lingering skepticism may give way to a reappraisal of Caesars as a growth stock wrapped in the skin of a traditional gaming giant.

With upside to analyst targets around $52.97, and a valuation that appears restrained, Caesars Entertainment looks like a diamond hiding in plain sight, ready to be discovered by investors willing to look beyond the usual headliners.

The third quarter of 2024 demonstrated Caesars’ capacity to maintain $1.0 billion in same-store adjusted EBITDA while the digital segment soared. Caesars Digital, generating $303 million in net revenues at a 40.9% year-over-year growth rate, now represents a substantial wedge of the business that could deliver outsized earnings contribution in future quarters. Looking at cumulative performance, total net revenues for the nine months ended September 30, 2024, reached $8.45 billion (same-store), only 1.3% lower than the prior year’s $8.56 billion. Within that relatively flat top line, however, is a transformative digital growth story.

As state regulations evolve and online betting gains mainstream acceptance, Caesars appears well-positioned to scale this segment exponentially. Combined with initiatives to lower interest expense and prudent capital management, these factors may eventually garner the attention of growth-focused investors and push the stock toward, if not beyond, current analyst fair value estimates. The company’s current trading multiples imply a steep discount, and as the digital engine revs higher, that discount may disappear, unveiling the hidden gem that Caesars Entertainment truly is.

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