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.
Despite Wall Street forecasts of a likely economic downturn over the next 12 months, prominent sports betting companies are still laser-focused on attaining profitability by late 2023.
Several top sportsbook operators are facing intense pressure from investors to break even by next year’s final quarter. Over the last several weeks, the topic dominated conversation on quarterly earnings calls, as leading sportsbooks remain in the red.
While a number of top companies narrowed losses over the third quarter, there is still skepticism that the vast majority of operators will break even by next spring. Operators that fail to turn a profit risk agitating investors even further, considering that the industry will celebrate the fifth anniversary of the U.S. Supreme Court’s PASPA decision in May.
When DraftKings reported third-quarter earnings on Nov. 4, the company plunged 28% on bleak earnings forecasts, suffering its worst one-day sell-off on record. At session lows, DraftKings fell to $11.12 a share, down more than 70% from when the company released third-quarter earnings last year.
Although DraftKings expects to attain profitability in next year’s fourth quarter, the company still projects adjusted EBITDA in the range of negative-$475 million to $575 million for full-year 2023. For the quarter, DraftKings reported average monthly unique payers of 1.6 million per month. The company still spent $322 million on sales and marketing, in line with expenditures in the same period a year ago.
— Jonathan Selvera (@JonDonJuan) November 7, 2022
Others are more sanguine. During its third quarter, Caesars’ online segment shaved losses by 77% to $38 million. Deutsche Bank analyst Carlo Santarelli indicated that the reduced losses stem from improved cost discipline across the digital unit. Caesars continues to rein in promotional expenses after determining that plans to spend $1 billion on growing its digital business proved to be unsustainable. CEO Tom Reeg believes the company’s online sports betting and iGaming unit has “a really good shot” to become profitable next year after delivering positive results in October.
For the most part, sports betting-related stocks moved higher in October. Such stocks have been battered throughout 2022 due to the combination of abnormally high inflation and concerns about profitability.
Opening price on Oct. 3: $15.43
Closing price on Oct. 31: $15.14
Monthly percent gained or lost: 2.4%
Year-to-date change: (-43.2%)
Market cap: $6.7 billion (as of Nov. 17)
Over the last several weeks, DraftKings has been the subject of intense speculation that it’s on the verge of signing a major sports betting partnership with ESPN.
The rumors began last month when Bloomberg reported on Oct. 6 that the two sides neared a potential deal. At the time, an analyst from Oppenheimer predicted that a partnership could be announced by or around the start of the NBA regular season, a date that has long since passed. The report also came on the heels of comments from Disney CEO Bob Chapek in September that ESPN does not plan to take on risk as a standalone sportsbook, but rather partner with a third-party sports betting operator.
During DraftKings’ third-quarter earnings call on Nov. 4, CEO Jason Robins sidestepped questions on a potential deal with ESPN. Instead, Robins told Wall Street analysts that the environment for major media partnerships has “improved dramatically” over the last 12 months.
“Some of the deals we had to pass on — in today’s environment — would be more rationally priced,” Robins said on the call.
CEO Robins doesn't address possible ESPN discussions; #DraftKings shares tumble 26% to near 52-week lows.
— Sports Handle (@sports_handle) November 4, 2022
Despite concerns that DraftKings would need to raise capital to complete an upfront payment in a potential deal with ESPN, Robins appears pleased with the company’s cash balance. DraftKings is poised to end 2022 with between $1.1 billion and $1.2 billion in cash, according to Robins, an amount he notes is roughly double the high end of 2023 adjusted EBITDA guidance.
Since dropping under $12 a share on Nov. 4, DraftKings has rebounded somewhat. The company traded around $14.50 on Thursday morning, up more than 30% from the monthly lows. Cathie Wood, a well-respected investment manager for ARK Invest, continues to buy DraftKings on the dip. On Nov. 4, ARK Invest bought more than 1.5 million shares of DraftKings, spread across three exchange-traded funds.
Flutter Entertainment (FLTR.L)
Opening price on Oct. 3: £9,710 pence
Closing price on Oct. 31: £11,330 pence
Monthly percent gained or lost: 16.7%
Year-to-date change: (-3.6%)
Market cap: $19.7 billion (as of Nov. 17)
On the same day that DraftKings released quarterly earnings, a New York arbitration court issued a decision in a longstanding dispute between Flutter and Fox Corp. The ruling from New York’s Judicial Arbitration and Mediation Services (JAMS) gives Fox Corp. the right to purchase an 18.6% equity option in FanDuel Group for $3.72 billion, with a 5% annual escalator. When the escalator is factored, FanDuel is valued around $22 billion, approximately double the $11 billion valuation that Fox Corp. sought when it filed suit against Flutter.
As expected, both sides claimed victory in the ruling. While the decision paves the way for Flutter to conduct a U.S. IPO for FanDuel, there are stipulations that must be followed. According to Fox Corp., Flutter cannot proceed with an IPO without approval from JAMS or a settlement between the parties. The arbitration tribunal is expected to issue a binding decision on the IPO by early next year.
— Eben Novy-Williams (@novy_williams) November 5, 2022
As of Monday, FanDuel captured an astounding U.S. market share of nearly 40% in the online sports betting space, according to Eilers & Krejcik Gaming. At FanDuel’s annual capital markets day on Wednesday, the company projected a target gross win margin of 12% in 2025. Customer confidence around pricing and parlays has sent FanDuel’s margin “structurally higher,” making it increasingly difficult for smaller operators to compete, JMP Securities analyst Jordan Bender wrote in a research note.
MGM Resorts (MGM)
Opening price on Oct. 3: $29.98
Closing price on Oct. 31: $35.57
Monthly percent gained or lost: 18.6%
Year-to-date change: (-21%)
Market cap: $14 billion (as of Nov. 17)
Although shares in MGM Resorts fell approximately 10% after reporting earnings on Nov. 2, the online division is not responsible for the sell-off, analysts concluded. A primary factor, according to Bank of America analyst Shaun Kelley, centered on regional margins, where MGM underperformed peers in the category. MGM Resorts owns a 50% stake in BetMGM, a joint sports betting and iGaming venture with U.K.-based Entain.
Revenue at BetMGM topped $1 billion for the first nine months of 2022, as the venture maintains a 22% U.S. share in active sports betting and iGaming markets. For the quarter, MGM’s share of BetMGM losses declined by more than 50% to $23.6 million. Though MGM Resorts CEO Bill Hornbuckle still believes that BetMGM will be profitable by this time next year, he did not guarantee that the division will break even in the first half of 2023.
“I don’t want to get ahead of ourselves,” Hornbuckle said on the earnings call.
Other stock movement
Among sports betting data providers, Genius Sports moved several points higher on Nov. 10 to $5.10 after beating analysts’ third-quarter estimates. For the quarter, Genius reported revenue of $78.7 million, topping estimates of $78.2 million.
A London-based sports betting data provider, Genius delivered sales growth of 13.8% from the prior year’s quarter. Driven by new customer acquisitions and the expansion of value-add services, revenue from the company’s Betting Technology, Content & Services segment increased 12.6% to $49.2 million.
For the first three weeks of the NFL season, Genius noted that in-play handle on NFL contests increased 70% compared the opening three weeks of the 2021 NFL campaign. The spike led to a 200% increase in in-play gross gaming revenue (GGR), in line with company expectations. Genius is the exclusive provider of official NFL sports betting data.
Sportradar, the archrival of Genius Sports, closed October at $9.90 a share, up 11.4% on the month. On Wednesday, Sportradar shot up 15%, ending the session at $11.71. At one point, Sportradar traded at a session-high of $12.77, its highest level in three months.
Sportradar delivered an earnings beat on Wednesday, as the company’s U.S. division grew third-quarter revenues by 61% to €31.6 million. The U.S. segment also reported adjusted EBITDA of €3.4 million amid positive developments with in-game betting. By comparison, the segment reported a loss of €6.6 million in the year-ago quarter.
Wynn Resorts jumped 8% on Nov. 10 to $74 a share on record adjusted EBITDA of $196 million from Wynn Las Vegas. Wynn Interactive, which operates the company’s WynnBET sports betting arm, cut losses by 82% to $18 million. Earlier in November, Houston Rockets owner Tilman Fertitta acquired 6.9 million shares of Wynn through his Fertitta Entertainment investment vehicle. The acquisition, which received a valuation of $377 million, made Fertitta the second-largest shareholder of the company.
PENN Entertainment ticked up to $32 a share on Nov. 4 after the company topped third-quarter earnings forecasts. PENN Entertainment reported earnings per share of $0.72, far above analysts’ expectations of $0.38.
According to their 13-F filing, Goldman Sachs purchased 4.5 million shares in Penn Entertainment during the third quarter.
This equates to an approximate 3% stake in $PENN, and may be resulting from total return swaps or other derivative trades on behalf of clients.
— Roundhill Investments (@roundhill) November 14, 2022
As the industry turns to the start of the 2023 calendar, mid-sized sportsbooks remain on edge. In the last month alone, Fubo Sportsbook and MaximBET announced the closure of sports betting operations. The abrupt shutdowns trigger concerns for smaller companies that the industry may consolidate sooner than expected.
The Roundhill Sports Betting & iGaming ETF (BETZ), an exchange-traded fund (ETF) that tracks the top sports betting and iGaming stocks in the industry, closed October at $14.77, up 11.2%. In a year of bearishness for gaming stocks, BETZ enjoyed one of its best months of 2022. The ETF moved even higher in mid-November, trading at $15.61 on Nov. 16, its highest level in two months.
BETZ, however, is still far below a record high of $32.65 in April 2021. At that point, the ETF more than doubled the level from its June 2020 debut. As of Thursday, PENN Entertainment, Kindred Group, and Entain plc ranked as the top three holdings in the portfolio, as each stock represented upward of 5% of the overall basket. Kindred is the top holding with a portfolio weighting of around 5.5%.
While BETZ trimmed holdings in Flutter and DraftKings in the last 30 days, both stocks are among the largest holdings in the fund.