Brad Allen, Legal Sports Report
The US sports betting market has hit its first real speed bump.
After a couple of years of stock upgrades, all-time highs and triple-digit growth, reality has set in.
Penn National Gaming and DraftKings are both down more than 50% from their highs, and sports betting stocks across the board are under pressure.
Analysts are increasingly flagging concerns about profitability. UBS for instance recently downgraded DraftKings because it likely won’t turn a profit until 2024.
Cash bonfire
In Q3 alone, DraftKings posted a net loss of $546 million. Through nine months of the year, the company made a net loss of $1.19 billion.
It’s not just a DraftKings problem. FanDuel expects a -$360 million EBITDA in FY21, while BetMGM is burning close to $100 million a quarter.
Elsewhere, Wynn recently decided it could no longer stomach similar losses and vowed to cut spending.
So how long can US sportsbooks keep burning cash before investors start to get cold feet?
Original recipe
“I think investors will accept aggregate losses as long as operators can clearly show they are making profit in more mature states like NJ and PA,” said Numis Securities analyst Richard Stuber.
“William Hill used to split its US division into newly regulating states and existing states. I think operators should start doing similar – not just a slide on a particular market in the presentation pack.”
What can we learn from New Jersey?
DraftKings is clearly thinking about this already, as CEO Jason Robins said after Q3 the company had achieved profitability in the Garden State.
“It’s still only a little over three years in, and we’re still seeing really strong user growth there,” Robins added. “If you look at the iGaming market, which is in its eighth year at this point, it’s still growing 30%+ percent. I think you’re going to see growth for many years to come in New Jersey.”
Devil in the detail for US sportsbooks
It is a little bit more complex than just “Are NJ customers profitable?” Investors must also consider:
1. Are newer customers less valuable than early adopters? Newer customers are more likely to be casual, which could change the lifetime value calculation. Penn CEO Jay Snowden argued earlier this year that industry LTV figures were not accurate. “Lifetime value is something that’s thrown around a lot,” Snowden said. “And it’s interesting because people are calculating lifetime value as if that customer is going to be loyal to you forever.”
2. Would NJ still be profitable if 25% of revenues disappear when New York online sports betting goes live? States like Arizona and Connecticut are also benefiting from betting tourists. Are industry estimates for the addressable market double-counting some bettors?
3. Are the profits enough to cover all the overheads and corporate costs that aren’t specific to each state? What scale is needed if not?
4. Would NJ be profitable without online casino and poker? The expansion of online gambling has been much slower than sports betting and there’s no guarantee it ever reaches the same coverage of states.
5. Would NJ be profitable at a higher tax rate? At 14.25%, NJ is one of the most operator-friendly tax regimes in the US. How do the numbers look with Pennsylvania’s 35% tax rate for example.
Rest is here…
