Las Vegas revenue beats are predicted for the third quarter, but so is a recession in 2023; and the macro factors that could hit casino groups next year would likely be felt by online sportsbooks.
On the one hand, U.S. casino groups are well aware of macroeconomic and recessionary factors, but those have so far not filtered through to spending levels on the casino floors. Although analysts at Wells Fargo recently commented that while third quarter earnings reports should reflect momentum in Las Vegas, and the U.S. gaming customer has been resilient, “economic and inflationary challenges abound and investors’ main concerns remain when, not if, those customers will crack”.
Meanwhile for online sportsbooks, a mixture of impatience on profitability timings from investors and difficulty in accessing capital as interest rates rise mean potentially significant additional costs to debt arrangements. As 888 and Entain have shown, having to negotiate debt currently is costly.
More broadly, a combination of those factors mean that the next 12 months could be crunch time for some online operators. There are, however, clear distinctions with regard to the different environments the digital brands work in.
Top of the tree
At the top we can see the large operators – FanDuel, DraftKings, BetMGM and Caesars Sportsbook – stacked with significant, but clearly not unlimited, backing from investors and with a clear path towards reaching EBITDA profitability in the next 12-18 months. FanDuel, of course, achieved that feat during the second quarter.
Just below those four sit the second tier of top operators: Barstool Sports, Rush Street Interactive and PointsBet, which, again, are on the whole well financed and have clear roadmaps in reference to how they can reach profitability.
They also have distinct strategies in terms of how they will leverage their brands. Barstool is going for the social media-personality-driven strategy that is clearly targeting young tech savvy demographics that are into sports and want to bet.
PointsBet is focusing on live betting, product- and tech-led user experience to power growth and margins; and Rush Street is making a clear play for online casino players with some online sports betting action sprinkled into the mix.
15 and counting
Below that second group, it is possible to observe a whole range of operators that are fighting over around 15% of the overall market. If that seems minimal for a market the size of the U.S., recent data from Eilers & Krejcik suggested that market concentration among the big four of FanDuel, DraftKings, BetMGM and Caesars had increased in the past year to 86%.
And as one corporate advisor told Earnings+More for its recent Deal Talk feature: “In a market where there are leading brands with 25% or 35% and others with 15% (market share), then you are fighting for single-digit percentages and that’s not sustainable.”
In that group we find brands such as 888/Sports Illustrated, Tipico, Unibet/Kindred, MaximBet, PlayUp and a few others. All have their USPs to varying degrees, but when it comes down to it, the common thread that runs through is that they have just 0.2% to 1% market share of the U.S. online sports betting market.
Kindred has recently argued that it is possible to be profitable in that vertical on such low levels of market share, as have some of the smaller online casino brands. However, U.S. sports betting is much less profitable and works to much tighter margins than iCasino, where profitability is feasible on such low market shares. In addition, further growth from online casino depends on it being regulated in more states, which is far from certain.
Much will depend on how the NFL season pans out, and by the second quarter of next year some of those smaller sportsbooks will have to decide on whether to continue in the U.S.
That time of year might well turn out to be a perfect storm in reference to negative market sentiments that could bring huge pressures on operators.
For example, when it comes to marketing and promotions costs, there is broad acceptance that spending levels have rationalized considerably with those of the past two years. However, having met management at G2E, the analysts at Jefferies commented recently that Penn Entertainment’s third quarter earnings will reflect “greater digital loss due to marketing spend ahead of NFL season”.
It will therefore be interesting to observe other operators’ marketing budgets in the third and fourth quarters. The other important factors that will impact operators will be debt levels and interest rates.
For large, well-capitalized operators that don’t have to worry too much about debt levels, this could mean “more upside with multiple other catalysts on deck”, as Jefferies says about Penn, including a visible path to profitability being led by FanDuel and others following their lower-than-expected adjusted EBITDA losses.
The smaller groups, however, may not be so lucky; come the end of the NFL season, their financial backers and board members may simply decide that the game isn’t worth the candle and decide to pull the plug.
Analysts reporting back from management meetings with both operators and suppliers at G2E all noted that there was no sign of activity slowdown. Truist Securities said unfavorable macro conditions were “not stopping the party” and despite “a near-certain recession looming, operators have not seen a major change in customer behavior either on the Strip or at the Regionals”.
“In-line with recent earnings commentary, the only slowdown is concentrated at the lower-end of the customer database, though in part due to less marketing attention to that segment. Overall, operators continue to preach gaming’s resistance to recessions, pointing to variable cost/pricing structures to mitigate any drop in revenues,” Truist added.
The online sector is benefiting from this ongoing activity, but should the likelihood of a “near-certain recession” come true and the consumer pull back is so steep among the well-capitalized Las Vegas and regional casinos is one thing. If it spreads to online sportsbooks that are already struggling with funding their activities as they try to generate market share, some of them might just decide to staunch the bleeding and call a stop to their U.S. endeavors.