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Technology Stocks : DraftKings, Inc. / Online Gambling
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From: Glenn Petersen11/23/2021 7:02:20 AM
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Posted on November 23, 2021
by Brad Allen
Legal Sports Report

The US sports betting market has hit its first real speed bump.

After a couple of years of stock upgrades, all-time highs and triple-digit growth, reality has set in.

Penn National Gaming and DraftKings are both down more than 50% from their highs, and sports betting stocks across the board are under pressure.

Analysts are increasingly flagging concerns about profitability. UBS for instance recently downgraded DraftKings because it likely won’t turn a profit until 2024.

Cash bonfire

In Q3 alone, DraftKings posted a net loss of $546 million. Through nine months of the year, the company made a net loss of $1.19 billion.

It’s not just a DraftKings problem. FanDuel expects a -$360 million EBITDA in FY21, while BetMGM is burning close to $100 million a quarter.

Elsewhere, Wynn recently decided it could no l onger stomach similar losses and vowed to cut spending.

So how long can US sportsbooks keep burning cash before investors start to get cold feet?

Original recipe

“I think investors will accept aggregate losses as long as operators can clearly show they are making profit in more mature states like NJ and PA,” said Numis Securities analyst Richard Stuber.

“William Hill used to split its US division into newly regulating states and existing states. I think operators should start doing similar – not just a slide on a particular market in the presentation pack.”

What can we learn from New Jersey?

DraftKings is clearly thinking about this already, as CEO Jason Robins said after Q3 the company had achieved profitability in the Garden State.

“It’s still only a little over three years in, and we’re still seeing really strong user growth there,” Robins added. “If you look at the iGaming market, which is in its eighth year at this point, it’s still growing 30%+ percent. I think you’re going to see growth for many years to come in New Jersey.”

Devil in the detail for US sportsbooks

It is a little bit more complex than just “Are NJ customers profitable?” Investors must also consider:

-- Are newer customers less valuable than early adopters? Newer customers are more likely to be casual, which could change the lifetime value calculation. Penn CEO Jay Snowden argued earlier this year that industry LTV figures were not accurate. “Lifetime value is something that’s thrown around a lot,” Snowden said. “And it’s interesting because people are calculating lifetime value as if that customer is going to be loyal to you forever.”

-- Would NJ still be profitable if 25% of revenues disappear when New York online sports betting goes live? States like Arizona and Connecticut are also benefiting from betting tourists. Are industry estimates for the addressable market double-counting some bettors?

-- Are the profits enough to cover all the overheads and corporate costs that aren’t specific to each state? What scale is needed if not?

-- Would NJ be profitable without online casino and poker? The expansion of online gambling has been much slower than sports betting and there’s no guarantee it ever reaches the same coverage of states.

-- Would NJ be profitable at a higher tax rate? At 14.25%, NJ is one of the most operator-friendly tax regimes in the US. How do the numbers look with Pennsylvania’s 35% tax rate for example?

Long runway to prove for US sportsbooks

The good news is that the underlying metrics in the early (and new) states are very strong. There was a reason investors were so bullish in the first place.

Eilers & Krejcik principal Chris Grove suggested in a recent podcast the change in attitude was an “overcorrection.”

“The player values suggest the US market will still end up among the most, if not the most, productive markets in the world,” Grove said.

Companies should also have a decent runway to prove themselves.

As one analyst told LSR: “In a market with an upside bias, meaning SPX just goes up every day, people stay patient longer than they otherwise would. I don’t see a major shift to people focusing on profitability in this type of climate….even if surely some are getting frustrated.”

A tale of two markets?

In the meantime, the pressure of profitability has caused an interesting split among US sportsbooks.

The likes of PointsBet and Wynn are looking to alternative strategies to compete while burning less cash.

PointsBet is investing in product, while Wynn will try to cater to high-rollers. Penn too continues to stay limiting external marketing spend as it grows the Barstool Sportsbook.

On the other side of the coin, DraftKings has no plans to slow down its investment as its models say new customers are more than paying for their acquisition costs. BetMGM and Caesars still appear to be in expansion mode too.

Will investors prefer one approach or the other? That remains to be seen, but the times when companies saw their valuation go up simply because they had sports betting exposure may be over.

The winners and losers going forward will be decided by execution rather than optimism.

When Do US Sportsbooks Need To Start Showing A Profit? (
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