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 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.
For months, beleaguered sports betting stocks have tested 52-week lows as the potent combination of persistent inflation and long-term concerns on profitability have dragged stocks down as much as 75% from last year’s highs.
And in the wake of the U.S. Federal Reserve’s largest interest rate hike in nearly 30 years, the threat of recession has triggered further unease. Last month, the Federal Open Market Committee (FOMC) increased its benchmark Federal Funds Rate by 0.75% in its largest single-month rate hike since 1994. Minutes of the June meeting released this week indicate that the Fed could hike interest rates another three-quarters of 1 percent at the next FOMC meeting later this month.
As inflationary pressures remain near a four-decade high, the Fed is attempting to restrain inflation by pursuing an upward path in setting interest rates. But the monetary policy comes with downside risk. Larry Summers, a former U.S. Treasury secretary, believes the risks of recession have increased dramatically over the last six weeks due to the Fed’s policy decisions.
While former Obama economic adviser Larry Summers warns a recession is “almost inevitable,” other experts say the economy is currently in “recession-like” territory already. https://t.co/XH6fxXHlc3
— NCGOP (@NCGOP) July 2, 2022
Speaking to Yahoo! Finance in May, DraftKings CEO Jason Robins expressed little trepidation on the possibility for reduced betting activity from an economic slowdown. Robins reiterated comments from DraftKings’ 2022 first-quarter earnings call when he asserted that the company’s cohort-level data remained “very healthy” in spite of broader macroeconomic concerns.
“Gaming has generally been very well performing during economic downturns, recessions, and inflationary periods,” Robins said. “This is not a new thing. This is something that’s been well known about the industry for quite some time. We’re certainly seeing the same thing materialize in our numbers.”
More recently, Macquarie analyst Chad Beynon described the “churn rate” for sportsbook operators over the second quarter as relatively low, a positive sign since revenue typically falls off in the second quarter due to seasonality. An operator’s churn is the rate at which customers stop conducting business with a company. Given the emphasis on customer retention among sportsbooks, churn rates across the industry will be a key metric to follow over the next several years.
Sara Slane, a former senior vice president at the American Gaming Association and a top industry consultant, also believes that broader macroeconomic factors will have little impact on the sports betting ecosystem.
#SportiConference Am I correct thinking sports betting is inflation proof? –@novy_williams “May not be recession proof, but don’t think it will be terribly impacted” –@Sara_Slane pic.twitter.com/YwJNvt4w3L
— Adam Wexler (@thewordpainter) June 14, 2022
In recent months, a trio of prominent sportsbook operators, including DraftKings, have separated themselves from the pack. The three companies, BetMGM, DraftKings, and FanDuel, comprise about 70% of the U.S. market share for legal sports betting. But the triumvirate has not seen the dominance translate to stock gains.
Last month, all three companies slumped more than 14%, extending losses over the first six months of 2022. The three heavyweights are down considerably in 2022, in line with sharp declines among tech stocks.
Opening price on June 1: $13.59
Closing price on June 30: $11.67
Monthly percent gained or lost: (-14.1%)
Year-to-date change: (-58.1%)
Market cap: $5.73 billion (as of July 6)
As DraftKings’ 50-day moving average hovers around $13 a share, numerous analysts have questioned whether the company has hit its bottom. Barclays initiated coverage in DraftKings last month with a price target of $14 a share, one that would have been almost unfathomable at this time last year. JMP Securities was a little more bullish with its price target of $25, along with a rating of “overperform.”
When Morgan Stanley resumed coverage of DraftKings in late June, the company gave DraftKings a price target of $31 a share, as well as a rating of “overweight.” By 2025, DraftKings is projected to maintain a U.S. market share of 24% in online sports betting, Morgan Stanley analyst Edward Young wrote in a research note. Downside risks, according to Young, include increased losses, heightened competition, and lagging product innovation.
Flutter Entertainment (FLTR.L)
Opening price on June 1: £9,730
Closing price on June 30: £8,244
Monthly percent gained or lost: (-15.3%)
Year-to-date change: (-17.2%)
Market cap: $14.8 billion (as of July 6)
Flutter remains embroiled in a dispute with Fox Corp. over the fair market value of its minority stake in FanDuel Group. In April 2021, Fox Corp. filed a lawsuit against UK-based Flutter over an 18.6% equity option in FanDuel. Fox Corp. is set to receive the option under Flutter’s May 2020 merger with The Stars Group.
The case is still pending in New York’s Judicial Arbitration and Mediation Services. Fox Corp. CEO Lachlan Murdoch expects the arbitration matter to be settled by the end of the summer.
MGM Resorts (MGM)
Opening price on June 1: $35.28
Closing price on June 30: $28.95
Monthly percent gained or lost: (-17.9%)
Year-to-date change: (-35.7%)
Market cap: $12.6 billion (as of July 6)
Despite seeing substantial declines in its stock price in recent months, MGM Resorts paid a dividend of $0.0025 on June 15 to investors of record as of June 10. MGM Resorts has a dividend payout ratio of 0.32%. The company announced on Wednesday that it will report second-quarter earnings on Aug. 3 after the close of the market.
MGM Resorts has a 50-50 stake in BetMGM. The other half of the North American online sports betting and iGaming venture is owned by UK gambling conglomerate Entain. BetMGM made waves last month when it announced plans to begin accepting sports bets on select Carnival cruises in international waters. Entain is scheduled to report 2022 second-quarter earnings on Thursday. Entain shares are down about 26% year-to-date.
Other stock movement
Among sports betting data providers, both Sportradar and Genius Sports ended the month below $10 a share. Sportradar closed the month at $7.90, while its archrival Genius ended June at $2.25, down more than 25%. The two sports betting data providers have each lost more than 50% on the year.
On the Australian Stock Exchange, PointsBet shares jumped 20% in a single session after the sportsbook operator announced that it secured an A$94 million investment from from SIG Sports Investments Corp., a division of Susquehanna International Group of Companies. The investment made SIG Sports the largest shareholder of the sports betting company. PointsBet ended the month at A$2.68 a share, down fractionally on the month.
The transaction is one of the largest investments from a financial trading firm into a sports betting-focused company since the Supreme Court’s historic PASPA decision four years ago, reports @MattRybaltowskihttps://t.co/hcQYNjRUUg @PointsBetUSA @PointsBet_AU#susquehanna
— Sports Handle (@sports_handle) June 21, 2022
One encouraging sign for operators in a sea of dread surrounds the decline in promotional spending over the last few months. As marketing costs spiraled out of control in February, Caesars Entertainment abruptly pulled a glitzy ad campaign, prompting its competitors to rein in spending on commercials. With data disclosed in four states — Pennsylvania, Michigan, Connecticut, and Arizona — online sports betting promotional spending as a percentage of gross gaming revenue (GGR) fell 18% in May, according to Truist Securities. On a relative basis, promotional spending fell to 28% of GGR in Pennsylvania on the month, compared with a whopping 107% in February, Truist found.
The Roundhill Sports Betting & iGaming ETF (BETZ), an exchange-traded fund that tracks the top sports betting and iGaming stocks in the industry, closed in June at $14.41, down about 12% on the month. BETZ hit its record high of $32.65 back in April 2021, reaching a level that more than doubled its June 2020 debut.