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Wall Street embraces promise of US sports wagering

(Ethan Miller/Getty Images)

  • Wide range of gambling-related companies have outperformed the overall market this year
  • Pandemic expected to accelerate state-level adoption of legal sports wagering
  • Industry growth to be buttressed by heavy confluence of sports events this fall

One of Wall Street’s highest flyers these days is a relatively small Boston, Massachusetts-based company that is focused on several facets of fan engagement, is not yet profitable, and has plenty of exposure and risk from the lack of live sports around the world due to the Covid-19 pandemic. 

But it still has seen its stock more than double over the last seven weeks, even after a broad dive of nearly 7 per cent across the entire US stock market on June 11. 

That company is none other than the newly public DraftKings, which is just one of several sports gambling-related companies seeing their shares far outpace the overall stock market in recent weeks as Wall Street quickly gravitates toward the upside possibilities of legalized sports wagering in the US.

DraftKings, which opened at $17.81 per share after going public in late April amid a three-way merger with gaming technology provider SBTech and special purpose acquisition company Diamond Eagle Acquisition Corp., is now trading above $36. Initial analyst price targets of $25 per share were quickly blown away within days of the DraftKings initial public offering, and those analyst targets now run as high as $50 per share.

But DraftKings is far from alone in the sports gambling bull market. Penn National Gaming, which earlier this year acquired a minority stake in sports and culture media company Barstool Sports with a pathway to control, has seen its stock rise more than 515 per cent since pandemic-related lows in March. MGM Resorts International is up 150 per cent overall in a similar timeframe. And stock for Churchill Downs Inc., which operates the BetAmerica sportsbook, has doubled in the last three months, with several other companies also posting strong double-digit percentage growth.

There are several clear and growing factors underlying the surges. Even with many sports still on hiatus, many sports gambling companies are still seeing strong consumer interest and growing revenue, with DraftKings recently reporting 30-per-cent revenue growth despite Covid-19. More US states continue to adopt various forms of legal sports wagering following the US Supreme Court ruling of 2018 allowing states to make their own rules in this area. And expectations are higher for accelerated expansion in the space once live sports reaches critical mass coming out of the public health crisis.

“Wall Street is sort of waking up to the fact that this is obviously an emerging sector with real movement now happening at the state level,” says Sara Slane, founder of gaming consultancy Slane Advisory and former senior vice-president of the American Gaming Association. “And everybody’s anticipating that coming out of Covid-19, we’ll see even more states moving toward legalization. So I’m not surprised to the big trajectory for some of these companies.”

In short, as the US stock market seeks a broader recovery amid the pandemic, and continues to experience choppiness amid fears of a virus resurgence, it is the sports gambling sector among those leading the charge.

New York-based Roundhill Investments went so far as to debut earlier this month a betting and igaming-specific exchange-traded fund (ETF) to allow investors to have exposure to multiple gaming companies at once, including both entities with prominent consumer-facing brands and others more focused on back-end infrastructure and services. Within days, Roundhill pulled in more than $75m in assets under management for the fund.

“This has all been sort of a US-based phenomenon,” says Will Hershey, Roundhill co-founder and chief executive, of the US public markets’ embrace of legal sports betting. “If you ask investors in the UK or Australia, this is not new news. And I would even say Sweden as well where there are also entities listed there, particularly on the igaming side. But just based on the number of US states that have done anything yet in this space, and the lack still of some of the really big states, we’re still in the early innings of what this will be here.”

Jason Robins, chief executive officer and co-founder of DraftKings (Marco Bello/Bloomberg via Getty Images)

Accelerating Trends

The DraftKings’ stock growth in particular was also buttressed by not only its bullish revenue growth coming out of the gate as a public company, but also news that prominent billionaire financier and political activist George Soros became an investor in the company through his investment vehicle Quantum Partners with a stake now worth more than $103m.

But Hershey says more broadly, Covid-19 is actually serving to amplify and accelerate business trends that were already happening in the marketplace. And for sports gambling in particular, that means cash-strapped municipalities that have seen their tax revenue battered in recent months amid the pandemic will look increasingly to sports wagering as a way drive new receipts, in turn driving the growth of publicly traded companies active in sports wagering.

“Coronavirus is pulling forward a lot of trends and the legalization of sports betting and igaming is no exception,” Hershey said. “There are many states now running tremendous budget deficits and they’re looking down the list of things they can do to raise tax revenue, and betting is near the top of that list.”

Slane agreed, saying that states not currently on board with a full set of legalization provisions for sports wagering will face increasing pressure to not lose the crucial tax revenue to nearby jurisdictions.

“States hate revenue basically being flushed out the door to their neighboring states and this is a way to recapture that,” she says.

But Wall Street is notorious for punishing even phenomenally successful companies such as Apple for not hitting certain growth targets, raising the question of whether the sports wagering sector that is now red hot will ultimately face retribution if the current rate of acceleration is not sustained.

Analysts say that a certain volatility will need to be accepted in the short term, given the relative immaturity of the sector, but that the long-term promise of sports wagering remains intact.

“Legalized sports betting and igaming markets are in their very early stages of growth, and we see an $18bn revenue opportunity at scale that also benefits from a sophisticated in-game wagering market,” says prominent investment bank Oppenheimer, which recently began institutional coverage of DraftKings with a 12-to-18 month price target of $48 per share. “While a premium valuation and high cash flow burn likely create above-average volatility near term, we emphasize the long-term nature of our rating.”

Adds Slane, “We still only really have a handful of states truly up and running [with sports betting] from a mobile perspective. So I still see more upside and growth potential.”

Fourth Quarter Expectations

The upcoming September-December period is poised to become particularly critical for the US sports wagering sector. Not only does the fall coincide with the seasons for the National Football League and college football, two of the most popular entities in all of US sports, but the season will also house some traditional spring events such as golf’s The Masters that were rescheduled due to the pandemic.

The period is also set to see both the rescheduled ends of the current seasons of the National Basketball Association and National Hockey League, and the starts of their 2020-21 campaigns.

Jason Robins, DraftKings co-founder and chief executive, said in the company’s recent earnings call that the increased confluence of sports events this fall presents large opportunities for the company, particularly as it relates to customer acquisition.

“Usually what we’ve seen is that when there is more popular sports going on, overall activity and overall revenue goes up,” Robins said. “That is something we typically, for example in Q4 when we have a lot of sporting activity going on, and I would expect we’ll see something similar [this year].”

That activity, in turn, will be reflected in fourth quarter earnings reports that will be released in February and March of 2021.

“Once you get a full quarter of sports being back, and that’s probably going to be the fourth quarter, that could be a real catalyst,” for further growth, Hershey says. “That could be a really big inflection point.”

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