DraftKings, No. 2 in U.S. online sports gambling, lost $1.2 billion in the first nine months of 2021 on $823 million in revenue.
Can this business ever make money?
Online sports gambling, once one of the hottest areas of the stock market, has fallen out of favor with investors.
Investors worry about fierce competition and steep losses driven by heavy marketing and advertising spending.
(ticker: CZR) in New York went so far as to match new customers’ $3,000 deposits after online sports gambling got under way in the state in early January. Industry profits might not come until 2023 or 2024.
The best plays could be regional casino companies with online sports-gambling businesses like
(BALY), and Caesars. Ireland-based Flutter Entertainment (PDYPY) owns a controlling stake in FanDuel, which is No. 1 in U.S. online sports gambling, ahead of
A profitable Flutter could be a better play than a very unprofitable DraftKings, which lost $1.2 billion in the first nine months of 2021 on $823 million in revenue. A FanDuel U.S. initial public offering is possible this year.
“There is a disconnect between the companies and investors,” says Thomas Allen, a Morgan Stanley analyst. “The companies see the U.S. sports-betting opportunity as massive and that we are in the very early innings of it. Their feeling is that they should be investing hand over fist to acquire customers and hope to retain for the long term. Investors want to see signs of profitability now.”
The promise is there. Sports betting is now legal in 30 states, with 22 allowing online wagering. Industry revenues could top $6 billion this year, up from $1.5 billion in 2020, and could hit $12 billion by 2025
One problem is taxes. New York levies a punitive 51% tax on industry revenue. While the vast bulk of states including New Jersey are in the 10% to 20% range, there is concern that states may raise taxes to boost revenue.
Here are the odds on six stocks:
After Bally’s stock fell to a January low of $26 from a peak of $75 last spring, its top shareholder, Standard General, made a nonbinding offer to take it private at $38 a share. Shares now trade around $37.
Shareholders like Adam Seessel of Gravity Capital Management thinks the price undervalues the company, which has a regional portfolio and an international online casino business. It now has a limited online sports-gambling business.
The company does have ample debt of $3.5 billion against a market value of $2 billion. “Bally’s business is rock solid. It can carry the debt,” Seessel says. He says the stock is inexpensive, trading for seven times annual free cash flow of $5 a share.
Boyd operates in 10 states and gets about a third of its profits from the lucrative Las Vegas “locals” market–smaller properties off the Strip that cater to area residents.
The company, whose shares trade around $70, recently reinstated a 15-cent quarterly payout for a yield of nearly 1%. Boyd gets little credit for its 5% stake in FanDuel, which could be worth at least $500 million, or about $4 a share.
Barry Jonas, a Truist Securities analyst, and Morgan Stanley’s Thomas Allen favor Boyd, which is valued at 14 times projected 2022 earnings. Boyd has less leverage than peers and owns much of its real estate. Jonas, who has a price target of $90, says Boyd has a free-cash-flow yield of 10%.
Caesars has one of the industry’s broadest portfolios, with regional properties and a presence on the Las Vegas Strip. It also has a lot of debt–$15 billion–and plans to reduce it this year.
Caesars has the highest valuation among its peers, trading at about 11 times projected 2022 earnings before interest, taxes, depreciation, and amortization, or Ebitda. The company is betting big on online sports gambling and on iGaming. It is willing to lose $1 billion before turning a profit, which it expects for sports gambling in the fall of 2023.
Morgan Stanley analyst Thomas Allen is bullish and has a $127 price target on the stock.
DraftKings received a recent upgrade from Morgan Stanley’s Thomas Allen, who said the online sports-betting opportunity was “too big to ignore.” Its shares are now up to $24 from a January low of $17.
Allen has a price target of $31 on the stock. He sees a “massive inflection” in DraftKings profitability in the coming years, to $1.1 billion of Ebitda in 2025 from an Ebitda loss of more than $800 million this year. That assumes that the online sports-betting revenue pool doubles by 2025 as states like California approve sports wagering.
DraftKings is sitting on $2 billion of cash. That might be enough cushion to last the company until potential profitability in 2024.
Flutter Entertainment is the online-betting leader in the U.S., the U.K., and Australia, Flutter has a 95% stake in FanDuel and owns PokerStars and U. K.-based Betfair. Its U.S.-listed shares are down 25% in the past year, to $75.
James Wheatcroft, a Jefferies analyst, argues that the stock is inexpensive on a sum-of-the-parts valuation. His price target on the stock is about 50% above the current price.
One catalyst could be a U.S. initial public offering of FanDuel, which was shelved in 2021 partly as a result of the departure of its CEO. FanDuel could be valued at a 25%-plus premium to DraftKings, thanks to its larger U.S. market share and lower losses.
Penn National Gaming
Penn National Gaming
was one of the worst stocks in the S&P 500 in 2021, falling 40%. A major reason was the claims of sexual misconduct against Dave Portnoy, the founder of Barstool Sports, its online sports-gambling partner. Portnoy has denied the allegations, but investors worry that the Barstool brand has been tarnished.
Barry Jonas, a Truist analyst, says that the stock price reflects no value for sports gambling. The Portnoy risk could be overdone. Truist surveyed sports bettors–who tend to be young men–and found that most had a favorable impression of him.
Jonas has a $65 price target, above the recent price of $50.
Write to Andrew Bary at email@example.com