Slowing consumer spending could weigh on the gaming sector in 2023, according to a new research note from Bank of America, which downgraded both Caesars (CZR) and Penn Entertainment (PENN) stocks.

BofA cited less overall credit card activity, flattening spend on gaming and declining visitation to both companies, bumping their Buy ratings down to Neutral and lowered their 12-month price targets.

“We think growth momentum is leveling out, with more balanced risks heading into [the first half of 2023],” Bank of America Research Analyst Shaun Kelly wrote. “Gaming, and especially regionals, are the largest ‘over-earners’ vs. pre-COVID in our coverage, but unlike other areas in consumer discretionary, estimates have not yet come down, leaving potential risk should the consumer soften.”

BofA emphasized the shift in consumer behavior over the course of 2022 as a key factor to consider. Gaming visitation had increased month by month to start the year, with Penn Entertainment seeing growth in the category by 10% and 28% in the first two months of the year. However, October and November saw declines compared to last year of 6% and 4%, respectively.

The same story played out for gross gaming revenue, which measures casino operators revenue after paying out winning bettors. GGR grew industry wide by 16% and 29% year-over-year in January and February but slowed to 1% growth year-over-year over the last two months.

The leveling of activity in the gaming sector plays into a larger narrative Bank of America has been tracking in its credit card spending. After robust spending growth year-over-year, peaking at a near 40% increase from 2021 in mid-February, total card spend dipped below last year's comparisons in December.

“Bank of America card data spending growth has recently reached its lowest levels of 2022,” Kelly wrote. “Gaming has [so far] been resilient, but there are risks from any combination of macro factors including inflation, rising unemployment, and or/a declining wealth effect/saving normalization.”

'Gains from here are likely to be harder to come by'

Caesars and Penn Entertainment haven’t taken the same approach to growth in the industry, particularly in terms of their digital approach.

Caesars spent heavily on promotions, leading to market share gain in New York early in 2020. That market share has since waned and Caesars has pulled back promotional spending. The company was able to eke out a profitable month of digital operations in October, according to CEO Tom Reeg.

Bank of America highlighted Caesars' strong growth from the pandemic rebound and integrations of casino operators Eldoraro and William Hill, but noted “gains from here are likely to be harder to come by.”