We recently published a list of The 7 Best Small-Cap Casino Stocks Hedge Funds Are Buying. In this article, we take a look at how Accel Entertainment, Inc. (NYSE:ACEL) compares to other small-cap casino stocks.

Overview of the global gaming industry

The gambling market includes the revenues of gambling service providers, 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, increasing usage of social media, and rising internet penetration are factors driving the market growth. According to the report, the Asia Pacific region is the major contributor to 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 gaming and casino companies. The South America region is expected to grow at a compound annual growth rate of 23.4%, while Africa is expected to grow at 8%. Rapid legalization and rising disposable income in these regions are contributing to the growth.

When analyzed by segments, the lottery segment accounts for more than 53% of the total market value and is expected to show the fastest growth during the forecast period.

New trends in the gaming industry

As artificial intelligence and augmented reality are booming, the gambling industry is also adapting to the trend of introducing immersive gameplay to online gambling. Many companies are developing augmented reality casino games that can be played in multiplayer mode on different devices.

Another hot trend in the industry is the wide adoption of online casinos where people can play online games. According to the report, the online gambling segment is expected to grow sharply during the forecast period and generate more than $124 billion. This indicates a strong market opportunity for casino companies to invest in developing interactive online casino games.

Small caps in the process of a multi-year low

Tom Lee, co-founder and head of research at Fundstrat Global Advisors, spoke about small cap stocks in a CNBC interview on August 16. Tom Lee believes that small caps are currently hitting a multi-year low and will outperform the market in the coming years. While explaining his case, Tom Lee mentioned that small cap stocks are trading at a P/E ratio of around 10 and earnings are expected to increase. If interest rates were to be cut during this time, small cap stocks would only benefit.

The story continues

Our methodology

To compile our list of the 7 best small-cap casino stocks that hedge funds are buying, we used Finviz and Yahoo Finance’s 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 and $2 billion. Next, we selected and ranked the stocks most held by institutional investors in the second quarter of 2024. The list is in ascending order of the number of hedge fund holders for each stock.

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

A customer enjoys a game of billiards at a tournament-style pool table in a gaming terminal establishment.

Accel Entertainment, Inc. (NYSE:ACEL)

Number of hedge fund owners: 14

Market capitalization as of August 21: $921.38 million

Accel Entertainment, Inc. (NYSE:ACEL) operates gaming machines and devices in bars, restaurants and supermarkets throughout the United States. As of June 30, the company owned and operated more than 25,700 gaming terminals at 4,034 locations in Illinois, Montana, Nevada and Nebraska.

The primary business activities of Accel Entertainment, Inc. (NYSE:ACEL) include the operation of gaming terminals that resemble slot machines, redemption devices that pay out winnings and function like automated teller machines, and amusement devices such as jukeboxes, dartboards, and pool tables.

Accel Entertainment, Inc. (NYSE:ACEL) is one of the best small-cap casino stocks that hedge funds are buying. ACEL was held by 14 hedge funds in the second quarter of 2024, with a total value of $165.95 million. Darlington Partners Capital is the largest shareholder in the company with a stake of $83.1 million.

The second quarter of 2024 was successful for the company, with revenue increasing 6% year-over-year to $309 million. Revenue growth was driven by an increase in gaming terminals and locations, as well as an increase in revenue generated per location, indicating Accel Entertainment, Inc.’s (NYSE:ACEL) strong market presence.

Revenue wasn’t the only financial metric that increased during the quarter. Net income also improved 46% year-on-year, reaching $15 million. The company’s profitability can be gauged by adjusted EBITDA, which improved 7% year-on-year, bringing in a record profit of $50 million.

Should you invest in Accel Entertainment, Inc. (NYSE:ACEL)? Here’s the bottom line:

We’ve already seen the company deliver record revenue and profits last quarter. What we haven’t talked about yet is its growing market presence. Accel Entertainment, Inc. (NYSE:ACEL) was able to increase its store locations by 5% and its gaming terminals by 6% year over year, indicating its growing market share in the industry.

Even if you take a longer-term view, you will see that ACEL has been a success story over the past 5 years, growing revenue by an impressive 26% and profit by 32%, restoring its long-term performance and solid fundamentals.

ACEL is also cheap at current levels. It trades at 13 times forward earnings, an 18% discount to its sector. Three analysts rate the stock as a “strong buy,” with their median 12-month price target at $15, representing 33% upside from current levels.

Total ACEL 5th place on our list of the best small-cap casino stocks to buy. While we recognize ACEL’s potential as an investment, our conviction lies in the belief that AI stocks are more promising to deliver higher returns and do so within a shorter time frame. If you’re looking for an AI stock that’s more promising than ACEL but trades at less than 5x earnings, read our report on the cheapest AI stock.

READ MORE: $30 trillion opportunity: The 15 best humanoid robot stocks to buy, according to Morgan Stanley And According to Jim Cramer, NVIDIA has “become a wasteland”.

Disclosure: None. This article was originally published on Insider Monkey.