Igaming Focus: High wire act

Igaming Focus: High wire act

  • Jake Pollard
August 24, 2022 2:00 PM

Investor sentiment is slightly more positive around gaming stocks, but with the new NFL season on the horizon, sportsbooks will have to find the right balance between market share, profitability and marketing spend. 

Are we over the worst of it? Has the storm passed? Can online gambling operators look to 2023 with a renewed sense of optimism that not only will most of them reach profitability in the next 18 months, but that their share prices will also recover to the levels they were enjoying pre-late 2021? 

After what has been a torrid eight months, where listed online gambling companies have seen their stocks take sustained beatings and have endured persistent questioning from investors and analysts over their lack of profitability, all the good news seems to have taken place during the second quarter of the year. 

In this regard, the industry can be thankful to Flutter Entertainment. When the group announced that its FanDuel sportsbook had reached EBITDA profitability during the quarter, the sighs of relief from its contemporaries were nearly audible on the earnings call.

Joking aside, the impact of the group’s figures will have acted as a spur of encouragement to the industry, even if the fact that it is the first U.S.-focused online sports betting brand to reach profitability is not surprising. 

By some distance, it is the leading OSB brand in the U.S. and has led the field ever since the rush of betting regulation started around 2018 before pulling away (potentially decisively) in recent months. 

Broader positives
As the analysts at Macquarie suggested in the past few days, the broader narrative around gaming stocks – they were up 27% in the past month against +12% for the S&P 500 – should continue going into the new NFL season as bookmakers restart their marketing campaigns to get new sign ups and push up betting volumes.    

The feedback from U.S. land-based operators (of all sizes) also suggests that the macroeconomic and inflationary pressures being felt across much of Europe have not hit their businesses to the same extent. 

So far at least, U.S. casino groups have not testified to such impacts and, after the pandemic-related lockdowns and the restructures those brought about, have expressed confidence in their abilities to sustain margins should any macro impacts come through among their customers.  

Catalysers
In its note, the Macquarie team said “we see more upside with multiple other catalysts on deck”, including a visible path to profitability being led by FanDuel and its contemporaries also posting lower-than-expected adjusted EBITDA losses. 

Indeed, from MGM Resorts to Rush Street Interactive and on to DraftKings, the leading online operators posted encouraging second quarter results.     

Macquarie says “this helps investors believe in companies’ path to profitability estimates and more importantly path to 20%-plus margins”. These raised levels of investor confidence are highly timely but they also come with major caveats.   

This is because there may be a tendency to think the worst of the downturn is over and the industry is once again about to enter an upward cycle of growth and expansion, when the reality is that capital markets are extremely tough to access and raising funds is very difficult currently.  

Cogs in the machine
With the new NFL season fast approaching and the sports betting industrial complex set to return to full volume, it may seem like U.S. operators will have the good fortune of avoiding the ‘perfect trifecta’ storm of macroeconomic issues brought on by the pandemic, cost of living crisis and the war in Ukraine. 

In which case the focus is likely to return to the nuts and bolts of their operations. In other words, the cogs in their sportsbook machines and the biggest areas of interest will be the size of their marketing budgets, how much they are spending on promotions and how their products are performing when it comes to generating margins.        

On this topic, we must once again return to DraftKings and its slow progress on generating not only more gross win from key betting products – such as same game parlays or bet builders (ostensibly very similar products) – but its own in-house versions of those products. 

In its recent second quarter statement, the group said SGPs were a top priority and it would seek to emulate FanDuel’s success in that field. But it is striking that it is still relying on third party providers for both products, thus diluting its revenues and not being able to benefit from the tech autonomy that was one of the key reasons for the merger with SBTech more than two years ago.       

Profitability vs. market share
The balance between gaining market share and generating profits will also play out in full view with the return of the NFL. Despite operators openly stating that they are reducing their marketing activities, it will be very hard for the leading contenders to generate either profits or market share without widespread advertising and promotions. 

FanDuel will also keep on pushing, or leaning in to use a well-known expression, to increase its lead over its key rivals. The chasing pack will have to find the right balance between marketing spend, chasing market share and/or profitability if they are to make up any ground on Flutter’s OSB leader.