Each month, our “Stock Watch” series examines recent trends in sports betting equities across Wall Street and outside the U.S. on top global exchanges. The red-hot U.S. sports betting market is now expected to grow to nearly $40 billion in annual revenue by 2033, according to Goldman Sachs. One prominent investment manager, Cathie Wood of Ark Invest, has taken a large position in DraftKings. She is not alone, as a wide range of institutional investors are bullish on sports betting. Come here early each month for a review of stock moves among the top publicly traded companies in the sports betting space.
Caesars Entertainment CEO Tom Reeg addressed Wall Street analysts on Feb. 22 against a backdrop of profligate spending across the legal sports betting industry, spending that had spun out of control in the months leading up to Super Bowl LVI.
Stuck far behind a bevy of competitors in the race to acquire new sports bettors, Caesars upped the ante following the completion of its acquisition of William Hill US. The resulting rebrand of William Hill’s U.S. segment to Caesars Sportsbook included a vow from the company to spend $1 billion on the expansion of its digital assets comprised of online sports betting and iCasino offerings.
The strategy featured a glitzy ad campaign accentuated with ubiquitous commercials featuring the Manning family and actor J.B. Smoove. But Reeg abruptly slammed on the brakes last month when he announced that Caesars planned to shelve the commercials for the time being.
In sidelining the Manning brothers for now, Reeg unveiled a broader strategy for tackling the puzzling calculus of capturing market share without spending to the moon. The shift, Reeg telegraphed, may indicate that the nation’s largest sportsbooks can no longer sustain ballooning customer acquisition costs. In January, Caesars shot to the lead in New York in market share for online sports betting, a spot it has since relinquished to FanDuel.
Addressing Wall Street analysts on Tuesday’s 2021 fourth-quarter earnings call, #Caesars Entertainment CEO Tom Reeg signaled that $CZR will curtail its spending on sports betting commercials considerably.@MattRybaltowski breaks it all down —https://t.co/IgDadgPoby
— Sports Handle (@sports_handle) February 23, 2022
“We set out to become a significant player, and it’s happened significantly quicker than we thought,” Reeg said on the call. “I think most of you know me as someone who’s not one to spend any money needlessly.”
Reeg’s unexpected pivot highlights Sports Handle’s monthly stock watch for February. Expect prominent gaming companies to grapple with tough business decisions on how to restrain acquisition costs while still attracting new bettors throughout 2022.
A shot in the arm or continued gloom?
The shift by Caesars could turn out to be a gift for its main competitors. Caesars, for instance, offered a customer-friendly sign-up bonus for new bettors in New York in an effort to establish a fertile customer base from the outset. Now, as Caesars tightens its belt on spending, others can follow suit, and advertising budgets can return to more manageable levels.
In response to Reeg’s comments, Caesars surged 8% after-hours on Feb. 22, clearing $80 a share. Days later, Caesars moved above $85, as analysts adjusted their valuation models on the company’s spending. A handful of sports betting stocks that had sunk to 52-week lows in recent weeks finally received the tourniquet needed to stop the bleeding. DraftKings also received a bump on Feb. 23, moving back above $20 a share. A day earlier, DraftKings traded as low as $16.56, its lowest level in a year. By early March, though, both stocks surrendered the gains.
Across the industry, sports betting-related stocks have fallen sharply over the last year as profitability concerns intensify. Flutter and DraftKings, which had valuations above $20 billion last spring, have seen their stock prices decline by more than half as investors express skepticism on when the industry giants will turn a profit. The rout has also battered others such as Wynn Resorts, PointsBet, and Rush Street Interactive, which have fallen more than 40% over the last year.
All sports betting stocks are on sale here before March Madness begins next week.$PBTHF PointsBet $RSI @RSInteractive_ $PENN @PNGamingInc
Are the 3 best imo. I would stay away from $DKNG as they are having cash burn issues and may need to raise more money.
— Will Meade (@realwillmeade) March 6, 2022
On last month’s earnings call, Wynn Resorts did not comment on a New York Post report that the casino may sell its online sports betting division at a significant discount to last May’s $3.2 billion valuation. Wynn’s pivot away from sports betting may suggest that the extravagant spending habits from top operators to acquire customers cannot be sustained. The need to curtail marketing spending dominated earnings calls from sportsbook operators throughout the month.
Flutter, the parent company of FanDuel, also addressed the unit economics on March 1 when the company released preliminary full-year results for 2021. During Fiscal Year 2021, Flutter’s U.S. sportsbooks maintained a 40%-plus market share in nine of the 12 states the company operated in, Flutter said. FanDuel distanced itself from the competition with a U.S. market share of 36% in 2021, according to boutique research firm Eilers & Krejcik Gaming. For the year, FanDuel maintained a double-digit lead in online sports betting market share over top rivals DraftKings and BetMGM, Eilers & Krejcik found.
Flutter CEO Peter Jackson noted that the company continues to maintain discipline in spending when others are investing heavily in promotions to boost market share. The pullback from Flutter’s competitors comes as Flutter’s dynamics for a ratio known as LTV-to-CAC continues to improve, he emphasized. The ratio measures a company’s long-term return per bettor relative to the amount it costs to acquire a customer.
Moreover, Flutter has been impressed with the results of FanDuel’s Same Game Parlay product, one it claims has helped drive the highest win margin on the U.S. market. A focus on honing product quality will improve “user stickiness,” thereby driving customer retention rates, Jackson indicated.
“You can acquire as many customers as you want, but you need the product to be able to make sure the customers have a great experience and stick around,” Jackson said on the earnings call.
Flutter Entertainment (FLTR.L)
Opening price on Feb. 1: £11,235
Closing price on Feb. 28: £10,795
Monthly percent gained or lost: (-3.9%)
Year-to-date change: (-8.1%)
Market cap: $16.5 billion (as of March 8)
Opening price on Feb. 1: $22.21
Closing price on Feb. 28: $23.68
Monthly percent gained or lost: 6.6%
Year-to-date change: (-14.9%)
Market cap: $7.2 billion (as of March 8)
DraftKings lifted projections on the total addressable market for North American online sports betting and iGaming at its Investor Day presentation on March 3. DraftKings now sees a clear path to profitability, as the company increased its North American TAM forecast to $80 billion, up $13 billion from previous estimates. DraftKings is also acquiring customers at a faster, more efficient rate, the company noted in the presentation. The company anticipates that it will generate a profit in 10 states this year, including Pennsylvania, Colorado, and Connecticut.
MGM Resorts (MGM)
Opening price on Feb. 1: $43.20
Closing price on Feb. 28: $44.29
Monthly percent gained or lost: 2.5%
Year to date change: (-4.1%)
Market cap: $16.5 billion
The Roundhill Sports Betting & iGaming ETF (BETZ), an exchange-traded fund that tracks the top sports betting and iGaming stocks in the industry, closed February at $21.64, down about 3% on the month. Last April, BETZ hit a record high at $32.65, more than doubling the exchange-traded fund’s price from its June 2020 debut.
The ETF, however, is down around 45% over the last 11 months amid the bearishness across the industry.