• Vice-Adjacent Economy investing targets B2B suppliers powering vice industries, not consumer brands.
• This strategy may reduce direct regulatory and reputational risks associated with sin stocks.
• Legalization waves in new markets create automatic growth for essential infrastructure providers.
• These companies offer exposure to high-growth sectors through more stable, recurring revenue models.

The Unseen Profits in Vice Industries

Let’s be honest, we all see the headlines. Flashing lights from new casinos, slick branding from cannabis companies, and endless debates from politicians about the moral fabric of society. It’s all very dramatic. But if you ask me, the real story, the one where the smart money might be flowing, is happening far from the cameras. It’s happening in the background, in the decidedly unglamorous world of the companies that provide the plumbing for these so called vice industries.

I’ve always been a fan of the old “picks and shovels” play. During the gold rushes of the 19th century, who made the most reliable fortunes? It wasn’t the poor souls panning for gold in freezing rivers, hoping to strike it rich. No, it was the chaps selling them the pans, the pickaxes, and the sturdy denim trousers. They profited from the rush itself, not the speculative hunt for a single nugget. The same logic, I think, applies today.

Why Bother With the Boring Stuff?

While the consumer facing brands are busy navigating a minefield of regulations, public opinion, and fickle customer loyalty, their suppliers are quietly getting on with business. Think about it. A company like International Game Technology supplies the slot machines and lottery systems. Does it care which casino brand is the flavour of the month? Not really. It gets paid for its hardware and software regardless. It’s a beautiful, simple model.

These infrastructure providers operate at a comfortable distance from the controversy. They aren’t the ones facing restrictions on advertising or banking. A company that makes hydroponic growing equipment, for instance, serves the perfectly legal agricultural market right alongside the burgeoning cannabis sector. This gives them a level of stability that the frontline businesses can only dream of. They get exposure to the growth of a new market without taking on all the associated baggage. It’s a strategy that bundles together the key players in this space, a sort of Vice-Adjacent Economy if you will, that focuses on the infrastructure.

The Modern Moat is Made of Code

Today’s vice industries are increasingly driven by technology, which creates a fantastic position for specialised providers. Online betting platforms require incredibly complex systems for processing payments, detecting fraud, and managing customer data. Once a casino or betting site integrates a particular company’s system, do you think they’re in a hurry to rip it all out and start again? Of course not. It would be a costly and disruptive nightmare.

This creates what the corporate types call a defensive moat. I just call it common sense. These technology suppliers often build long term relationships based on recurring revenue. They aren't just selling a product, they are providing an essential, ongoing service. As the world of gambling and cannabis moves further online, the demand for this digital plumbing could only increase, favouring the tech firms over the traditional brick and mortar operators.

A Necessary Word of Caution

Now, before you get carried away, let’s be clear. There is no such thing as a risk free investment, and anyone who tells you otherwise is probably trying to sell you something. These supplier companies are not immune to trouble. A severe economic downturn could hit discretionary spending, which means fewer people gambling or buying cannabis products. This would inevitably trickle down to the companies that service them.

Furthermore, there’s always the risk that regulators might decide to cast a wider net, or that a huge tech giant could decide to enter the market and throw its weight around. Competition is a constant, and market saturation is a real long term concern. The explosive growth seen during initial legalisation waves won’t last forever. Still, for an investor looking for a pragmatic way to approach these complex markets, focusing on the picks and shovels seems like a rather sensible place to start looking.

Deep Dive

Key Companies

• Everi Holdings Inc (EVRI): Provides backbone technology for casinos, including payment processing for slot machines and player loyalty systems. It profits from transactions on its systems without owning casinos or taking gambling risks.
• International Game Technology (IGT): Supplies gaming machines, lottery systems, and digital betting software to casino operators and lottery providers.
• WM TECHNOLOGY INC (MAPS): Operates a leading cannabis marketplace and provides compliance software to the cannabis ecosystem without directly handling the plant.

Primary Risk Factors

• Regulatory changes could impact the entire supplier ecosystem, not just consumer-facing companies.
• Economic downturns can reduce discretionary spending on gambling and cannabis, lowering demand for infrastructure services.
• Competition from larger technology companies with greater resources entering these specialized markets.
• Market saturation in mature, legalized markets could lead to moderating growth rates.

Growth Catalysts

• Ongoing legalization of gambling and cannabis in new states and countries creates expanding addressable markets for infrastructure providers.
• The shift from physical to digital platforms increases demand for specialized software, payment processing, and technology services.
• Industry consolidation can benefit established suppliers as merged companies standardize on fewer technology platforms.
• Technology providers often benefit from recurring revenue models and high switching costs for their customers.