In this article, we will look at the 7 Best Small-Cap Casino Stocks Hedge Funds Are Buying.

Global Gambling Industry Overview

The gambling market comprises sales from gambling service-providing companies including casinos, bingo halls, online gaming terminals, and sports betting. According to the Business Research Company, the global gambling market was valued at $540.3 billion in 2023. The market is expected to grow at a compound annual growth rate of 6.6% to reach $744.8 billion by 2028.

Legalization of gambling, rapid urbanization, increased use of social media, and rising internet penetration rate are factors driving market growth. As per the report, the Asia Pacific region is the main contributor in the global betting industry accounting for more than 32.4% of the total market valuation. The Asia Pacific region is followed by North America and Europe. Looking ahead, South America and Africa are expected to be the next hot markets for gambling and casino companies. The South American region is expected to grow at a CAGR of 23.4%, whereas Africa is expected to grow at 8%. Rapid legalization and increasing disposable income in these regions contribute to the growth.

If we look at the segment-wise analysis, the lotteries segment accounts for more than 53% of the total market value and is expected to grow at the fastest rate during the forecasted period.

Emerging Trends in the Gambling Industry

With artificial intelligence and augmented reality on the boom, the gambling industry is also adapting to the trend of introducing immersive gameplay for online gambling games. Many companies are developing extended reality casino games that can be played in multiplayer modes using different devices.

Another hot trend in the industry is the wide acceptance of online casinos, where people can gamble through online games. As per the report the online gambling segment is expected to take off during the forecasted period and gain more than $124 billion. This indicates a strong market opportunity for casino companies to invest in developing interactive online casino games.

Small Caps in a Process of a Multi-Year Bottom

Tom Lee, Fundstrat Global Advisors co-founder and head of research appeared on a CNBC interview on August 16 to talk about the small-cap stocks. Tom Lee believes that the small caps are in the process of a multi-year bottom and believes that they will outperform the market in the upcoming years. While explaining his case, Tom Lee mentioned that small-cap stocks have been trading at a Forward P/E of around 10 with earnings expected to grow and if rate cuts happen during this time it will only benefit the small-cap stocks.

Now that we have looked at the gambling industry and how small-cap stocks are expected to perform. Let’s now talk about the 7 best small-cap casino stocks hedge funds are buying.

Our Methodology

To compile our list of the 7 best small-cap casino stocks hedge funds are buying, we used the Finviz  and Yahoo Finance stock screener. We selected the Gambling industry to get a consolidated list of stocks. To get small cap stocks we set the filter between $250 million to $2 billion. Next, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q2 2024. The list is in ascending order of the number of hedge fund holders for each stock.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

7 Best Small-Cap Casino Stocks Hedge Funds Are Buying

7. Gambling.com Group Limited (NASDAQ:GAMB)

Number of Hedge Fund Holders: 11

Market Capitalization as of August 21: $364.898 million

Gambling.com Group Limited (NASDAQ:GAMB) is a performance marketing company that operates in the gambling industry. The company provides digital marketing services through its portfolio of branded websites that offer reviews and gambling services comparisons.

The company operates through two main business segments including Digital Marketing Services and Branded Websites. Through the Digital Marketing segment, it offers B2B marketing services to online gambling operators. Whereas, it publishes gambling industry content through more than 50 branded websites including Gambling.com, Bookies.com, Casinos.com, and RotoWire.com.

Gambling.com Group Limited (NASDAQ:GAMB) demonstrated strong performance in the second quarter of 2024, showcasing a robust growth trajectory in the online gambling industry. The revenue of the company grew 18% year-over-year to reach $30.54 million during the quarter, ahead of market consensus by $3.63 million. Revenue growth was on the back of strong performance in the iGaming segment across Europe.

Europe is one of the strongest markets for Gambling.com Group Limited (NASDAQ:GAMB). Its Europe iGaming revenue was up 111% year-over-year indicating strong market presence. While growth in Europe was impressive, the overall international revenues were also lucrative and grew 70% year-over-year.

Alongside revenue growth, the company was able to improve its earnings and grew its adjusted EBITDA by 19% year-over-year to reach $12 million, depicting the profitability of its operations. The competitive edge of the company arises from its robust portfolio of established brands around key market locations. Its strong brand presence drives a high-intent audience, which is critical for sales conversion in the gambling and casino industry.

Gambling.com Group Limited (NASDAQ:GAMB) presents an attractive investment opportunity not only because of its strong quarterly performance but a 5-year history of generating revenues. During the past 5 years, the company has grown its top line by 42% and bottom line by 85% indicating strong fundamentals and high profitability.

GAMB is cheap at current levels. It is trading at 13 times its forward earnings, a 3% discount to its sector. Moreover, its earnings are also expected to grow by 44% during the year to reach $0.23. GAMB was held by 11 hedge funds in Q2 2024, with total stakes worth $21.6 million, making it one of the best small-cap casino stocks hedge funds are buying. G2 Investment Partners Management is the top shareholder of the company with a position worth $6.67 million.

ClearBridge Small Cap Value Strategy made the following comment about Gambling.com Group Limited (NASDAQ:GAMB) in its Q3 2023 investor letter:

“In the communication services sector, Gambling.com Group Limited (NASDAQ:GAMB) was our top individual performer. A leading provider of digital marketing services to the global online gambling industry, the company saw its stock price rise after announcing second-quarter earnings that exceeded analysts’ expectations and raising its full-year guidance, and as the football sports betting season began. Gambling.com has rapidly reached profitability in its North America lead-generation business for sports betting sites, which continues to offer compelling growth opportunities as more U.S. states legalize online gambling, while its mature European business continues to see growth from improved search engine optimization. Ultimately, we believe the company’s low marketing and capital expenditures, combined with the attractive opportunities from growth in online sports wagers, will make Gambling.com a strong long-term compounder for the portfolio.”

6. Bally’s Corporation (NYSE:BALY)

Number of Hedge Fund Holders: 13

Market Capitalization as of August 21: $693.18 million

Bally’s Corporation (NYSE:BALY) is a casino entertainment company that owns and manages casinos, golf courses, and horse tracks and also owns an international interactive online platform. The company operates through two main business segments: Casino & Resorts and Interactive Segment.

The entertainment company currently owns and manages 15 casinos across 10 states, a golf course in New York, and a horse track in Colorado. In addition, Bally’s Corporation (NYSE:BALY) also has access to 18 Online Sports Betting (OSB) licenses in 18 states.

Bally’s Corporation (NYSE:BALY) is one of the best small-cap casino stocks hedge funds are buying. We say this because it was held by 13 hedge funds in Q2 2024, with total stakes worth $47.85 million.

The company posted a successful second quarter of 2024. Its revenue increased 3% year-over-year to reach $622 million. Revenue growth was mainly due to strong performance in the North America Interactive segment, which grew 95%. The UK market was also a success and witnessed 9% revenue growth. However, the non-UK operations within the Interactive segment were a drag thereby leading to a 7% decrease in the overall International Interactive segment.

Despite the decline, the company was still able to improve its earnings and gained more than 130 base points in adjusted EBITDA margins year-over-year. Improvement in earnings despite a whole segment losing revenue indicates diversified revenue streams and strong management.

Moreover, Bally’s Corporation (NYSE:BALY) has also been able to improve its operations. For instance, the company aggregate visitations for Chicago exceeded 1 million players and the month of June alone experienced 120,000 players. The company also reduced its core capital expenditure by $50 million for the year, thereby improving its earnings and profitability.

Is Bally’s Corporation (NYSE:BALY) a good investment?

We have already seen that Bally’s Corporation (NYSE:BALY) was able to grow its revenue and earnings during the previous quarter. However, what’s more notable is its ability to grow its revenue by 38.60% over the past 5 years and EBITDA by 11.7%. Moreover, the $163 million in cash and cash equivalents on its balance sheet provides significant room for growth in the near term.