If you happen to own any casino stocks, consider this a warning: The decision to close the greatly ballyhooed Revel casino and hotel in Atlantic City, New Jersey, just two years after it opened is something of a microcosm for the gaming industry.

It would be hyperbole to suggest all casinos like those owned by Caesars Entertainment (CZR), Las Vegas Sands (LVS), and MGM Resorts (MGM) are on the verge of being wiped off the face of the earth.

But it wouldn’t be overstating things to suggest CSR, LVS, and MGM stock are headed into a headwind that simply can’t be sidestepped or shrugged off.

A Red Flag for All Casino Stocks

Once heralded as a seed of re-invigoration for Atlantic City’s gaming, this week, Revel closed its doors … forever.

The shuttering of the establishment itself wasn’t terribly remarkable; more than a few casinos recently have been forced to close shop as the industry struggles to remain relevant (and viable) in the current consumer environment.

The closure of Revel should have been remarkable for investors who may own casino stocks, however, because it’s apt to be illustrative of gaming industry’s woes everywhere.

Some fans, supporters and owners of casino stocks may argue that the shutdown of the Revel resort, the Showboat casino, and soon, Trump Plaza, merely underscores a small piece of New Jersey’s gambling dynamic — too many casinos in the same place at the wrong time. Nearby Pennsylvania and Delaware have both recently upped the ante on gambling options, rerouting at least some gamblers who once made the trip to Atlantic City. For perspective, New Jersey’s casinos generated $4.9 billion in revenue in 2007, but only drove $2.8 billion in revenue last year. This year is looking even worse.

Granted, New Jersey also recently legalized online poker (for real money), and given the initial numbers, it’s not a stretch to presume some of the gamblers who were previously forced to step foot in casinos are now placing bets from the comfort of their own homes. Throw in the fact that Revel was aiming to be as much of a beach resort as it was a casino, and it seems plausible it was Revel’s concept that was flawed rather than a lack of demand for gaming.

But the problem might be neither cyclical nor geographical; online betting has only shown tepid interest thus far. The problem is more likely social and structural — with a pinch of market saturation — and isn’t the sort of the challenge casinos can overcome with smarter spending.

As evidence to that end, one only has to look at other once-hot gaming locales in the U.S.

Many of them were where Atlantic City is now. Take Tunica, Mississippi, as an example. In 2006, the area’s casinos generated $1.2 billion in gaming revenue. That figure had been whittled down to just $738 million last year. It was enough of a decline to prompt Caesars to close its Harrah’s resort in Tunica a couple of months ago. And just so there’s no doubt, John Payne — Caesars president for that particular market — said about the decision, “There’s just too much supply in that market.”

Even the relatively strong increase in gaming revenue in Las Vegas has been limited on an absolute basis. Last year’s gambling revenue last year was only up 7.2% from 2007’s levels, and though it’s up a little more so far this year, none of Las Vegas’ icons like Caesars Entertainment or Las Vegas Sands are reliving their pre-2007 glory days.

Bottom Line

Again, it wouldn’t be fair to call casino stocks a lost cause. Less than half of the nation’s states allow casinos (28 allow them on Indian reservations, 39 states in all), and the potential tax revenue of casinos is at least being discussed by most of the other half. Relying on legislation for growth isn’t a sound investment thesis, however.

Moreover, even if more states were to legalize casinos, there’s no guarantee more gaming revenue (and therefore more tax revenue) would be generated. History simply shows it’s redirected and/or diluted.

Through 2011, the gaming industry could rely on a “if you build it, they will come” approach, meaning more casinos generated more revenue. The end result of that way of thinking: As of the latest number-crunching, one third of the entire nation — and more than half of its residents — are within 25 miles of a casino. The bulk of the populous could be at a casino with a drive of three hours or less.

A funny thing happened after 2011, though. U.S. consumers began to spend less on gambling, per capita. As an example, five years ago, 83% of Las Vegas’ visitors gambled, while only 71% of last year’s visitors gambled.

For an entertainment destination like Las Vegas, the city can offset weaker gambling revenues with stronger shopping and entertainment revenues. And it has. Thirty years ago, nearly 60% of the Las Vegas’ strip’s revenue was generated by casinos. Now gambling only makes up about 36% of the city’s entertainment revenue. For Tunica and Atlantic City, though, where gambling is the only real draw, the new spending mind-set is the reason the regions have been seeing waning revenue for years now.

Bottom line?

There are more U.S. casinos than ever before, and they’re more accessible than ever before. Throw in the fact that Americans are less interested in gambling than they’ve been in years (with no end in the sight), and what you have is an old-fashioned saturation problem.

That could work against casino stocks for a long, long time … at least until more closings whittle the amount of supply back down to actual demand.

Investors beware. Revel, Showboat, and Trump Towers aren’t the last casinos to find their way to the chopping block.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.