Subscribers to Chart of the Week received this commentary on Sunday, February 18.
The Super Bowl is, for Bengals fans particularly, mercifully over. The Big Game has been the zenith for overzealous gambling, and the 2018 U.S. Supreme Court ruling ensured that sports betting – and the tireless commercial load they bring – is here to stay. Pretty soon you’ll be inundated with March Madness betting, then NBA playoffs, then baseball, and all of a sudden we’re back to football. There’s no offseason to sports betting, and this endless cycle of rotations (aka dollars) has made stocks in this sector intriguing to investors.
It’s been almost six years since the Supreme Court struck down the Amateur Sports Protection Act. In that span, 38 states have helped the sports betting industry grow from fledgling, speculation-based conjecture to a fully functioning autonomous entity, complete with an endless cache of advertisement money. But now that the sports betting industry can’t sneak up on anyone, have some of these former growth stocks jumped the shark?
Sports betting has its pure players, then larger entities dabbling or dipping their toe in. DraftKings, a special purpose acquisition company (SPAC) from late 2019, is a purebred, with a 30% sports betting revenue in the U.S. last quarter. For four years, SPAC firebrand was the only pure-play sports betting stock out there. But in the last two weeks, investors finally have a new toy to play with. On Jan. 29, international conglomerate Flutter Entertainment (FLUT), parent company of FanDuel, made its New York Stock Exchange (NYSE) debut as a secondary listing. The FanDuel sportsbook is the number one sportsbook in the country, with a revenue share of 40%. FLUT is up 3.3% in February in its U.S.-listed trading infancy. A distant third in sports betting revenue share is MGMBet, owned by MGM Resorts International (MGM). This is where we get to the dabblers, the casino operators that offer sportsbooks. PENN Entertainment (PENN) falls into this category and is a player to watch, given its Sportsbook has rebranded as ESPN Bet in a deal with Walt Disney (DIS) that cost a tidy $333.8 loss to launch. DraftKings and FanDuel seem locked into a tussle for that number one spot. MGM and PENN are lurking, but also must account for Cesars Sportsbook from Cesar’s Entertainment (CZR), and Fanatics-owned PointsBet. The latter’s initial public offering (IPO) could hit this summer and bring another player into an already-crowded sports betting landscape.
DraftKings, MGM Resorts, and PENN all reported earnings this past week. DraftKings reported a fourth-quarter top-line miss after the market closed on Thursday, but still secured five price-target hikes, with the highest from Craig-Hallum to $55 from $45. DKNG is up 27% in 2024 and 151% year over year. MGM is fresh off a post-earnings bear gap, shedding 6.3% on Thursday thanks to the casino operator’s revenue miss. The stock is marginally lower both year to date and year over year. PENN shed 14.5% on Thursday, after fourth-quarter earnings and revenue both fell short of estimates. The stock is now down 27.5% in 2024 and 41% in the last 12 months, nearing its Oct. 30 multi-year low of $18.35. One day after the report, seven price-target hikes ensued, the worst coming from Jefferies to $20 from $30. Why did analysts wait one session to dole out those bear notes? The brokerage bunch was likely waiting on DraftKings’ results. It speaks volumes that Wall Street rushed to coronate DraftKings after a lackluster report, while PENN was drastically marked down.
It was fun to speculate on DKNG and PENN in 2021 when there was so much untapped potential. The future of the industry was such an unknown – which states will legalize, which won’t? – that the stocks were high-profile short squeeze targets. Now, with sports betting nearing critical mass, has that contrarian potential been wrung out? Per Schaeffer’s Senior Quantitative Analyst Rocky White, DKNG shorts built through the pandemic, peaked in mid-2022, and are currently at their lowest level in about three years. PENN’s short interest, on the other hand, spiked at the beginning of the pandemic and peaked in mid-2020. It hit a post pandemic low in mid-2022 and now sits relatively high. That would conceivably place PENN as a ‘buy the dip’ candidate, but given the poor fundamentals and competition, there’s a lot that would have to go right for the stock to reclaim its former glory.
That former glory is really far off. Take the Roundhill Sports Betting & iGaming ETF (BETZ), with DKNG and FLUT the top two holdings. While BETZ is 9% higher year over year at $18.03, that’s a far cry from all-time high levels above $33 from spring 2021. The same can be said for DraftKings and PENN, which are trading well off their all-time high levels of 2021, per the chart below.
PENN shed 14.5% on Thursday, after fourth-quarter earnings and revenue both fell short of estimates. The stock is now down 27.5% in 2024 and 41% in the last 12 months, nearing its Oct. 30 multi-year low of $18.35. One day after the report, seven price-target hikes ensued, the worst coming from Jefferies to $20 from $30. Why did analysts wait one session to dole out those bear notes? The brokerage bunch was likely waiting on DraftKings’ results. It speaks volumes that Wall Street rushed to coronate DraftKings after a lackluster report, while PENN was drastically marked down.
It was fun to speculate on DKNG and PENN in 2021 when there was so much untapped potential. The future of the industry was such an unknown – which states will legalize, which won’t? – that the stocks were high-profile short squeeze targets. Now, with sports betting nearing critical mass, has that contrarian potential been wrung out?
Per Schaeffer’s Senior Quantitative Analyst Rocky White, DKNG shorts built through the pandemic, peaked in mid-2022, and are currently at their lowest level in about three years. PENN’s short interest, on the other hand, spiked at the beginning of the pandemic and peaked in mid-2020. It hit a post pandemic low in mid-2022 and now sits relatively high. That would conceivably place PENN as a ‘buy the dip’ candidate, but given the poor fundamentals and competition, there’s a lot that would have to go right for the stock to reclaim its former glory.
Take the Roundhill Sports Betting & iGaming ETF (BETZ), with DKNG and FLUT the top two holdings. While BETZ is 9% higher year-over-year at $18.03, that’s a far cry from all-time high levels above $33 from spring 2021. The same can be said for DraftKings and PENN, which are trading well off their all-time high levels of 2021, per the chart below.
But don’t blow the final whistle on the sector just yet. A CNBC report showed Jefferies now estimates the sports betting industry at $37.5 billion total addressable market in the United States. Per Morningstar, U.S. sports betting revenue grew 40% to about $11 billion in 2023. And this is all without Florida and Texas – two massive untapped revenue streams — legalizing sports betting. It’s purely speculation if or when those sports-crazed states fall in line, but it remains a lurking tailwind to monitor.
For the third quarter of 2023, in the most recent version of the U.S. Census Bureau’s Quarterly Survey of State and Local Tax Revenue (QTAX), sports betting generated national state level sales tax and gross receipts of $505.96 million, up 20.5% from the same quarter a year before, but down from $571.48 million the second quarter of 2023. You can bet – no pun intended – that those numbers will rise in coming quarters with the NFL playoffs and Super Bowl getting factored in.
The recent string of lackluster earnings and sentiment trends are facing off with indicators of massive revenue flows in the macro sense. So are sports betting stocks a has-been investing trend, a former flavor of the week gone the same way of pot stocks and video game headsets? Or are we still in the nascent stages of a potentially very lucrative inflection point for the sports betting industry? It depends on what you bet on.