Play ball! Now that baseball is back, it’s time to jump into sports betting.
Since the U.S. Supreme Court struck down the federal ban on sports betting two years ago, investors have been trying to figure out prospective winning stocks. Much of the attention has gone to pure plays in sports betting and iGaming—Flutter, DraftKings, and a swarm of Swedish gamers like Kambi and Kindred.
Now, attention is turning to U.S. casino companies for whom sports betting and iGaming can drive the stock prices.
Much of that attention has focused on Penn National, which excited investors in January by buying a 36 percent stake in Barstool Sports for $163 million, with the option to eventually acquire 100 percent.
The buzz was about the potential of Barstool’s 66 million users and their demographics, mostly young men who can spill over into table game players online or in PENN’s network of brick-and-mortar casinos.
Of course, anyone who invests in PENN based on Barstool is also buying those brick-and-mortar casinos, most of which are now owned by REIT Gaming & Leisure Properties. They’re buying into an industry slammed by Covid-19—and that’s slow to no-growth beyond that.
One equity analyst who sees the divergence is David Katz of Jefferies. He recently put a hold rating on PENN and a target of $38, not much beyond its current stock price.
However, Katz sees potential in sports betting. He values it at $22 a share, meaning he sees this embryonic business already worth 37.5 percent more than the casino business. If PENN can get 10 percent to 12.5 percent of the nation’s sports betting market at 15 percent operating margin, Katz calculates, it’s worth $19 to $25 a share. And he isn’t giving up on the overall company, thinking it can run up to $70.
Thomas Allen of Morgan Stanley likes PENN with a $47 target. He also sees sports betting worth $22 a share.
Attention is now turning to Caesars as it combines with Eldorado Resorts.
Most investor focus on Caesars has been on its ability to cut spending by $800 million over the next three years and reduce debt burden.
But the new Caesars is also a sports betting story. The company has the world’s largest player database. Also, Eldorado brings to the combined company its 20 percent ownership of William Hill US. Thus, CZR is a triple play on sports betting:
- Players from its database
- The William Hill revenues it shares, including the latter’s operations at non-CZR properties
- The appreciating equity value of its 20 percent stake
Equity analyst Chad Beynon at Macquarie initiated coverage of the new CZR with a $60 target, which would be a 60 percent appreciation. Of that, he ascribes $19 to sports betting.
He’s overall bullish on CZR, seeing it earning $3.62 a share in 2022 and with a miniscule enterprise value-to-EBITDA of 1.4 times his estimates for that year.
Take A GANder at This One
One of the biggest opportunities among U.S.-listed gaming stocks may be one of the smallest companies, GAN.
GAN has already had an extraordinary run. A year ago, investors could buy the stock on the London exchange for what amounted to less than US$1 a share. Today, Nasdaq-listed GAN is around $25 after IPO’ing in May at $8.50.
CEO Dermot Smurfit is committed to making GAN an American company. The scion of one of Ireland’s most storied families, Smurfit has done more than change his company’s listing to the U.S. He’s become a permanent resident.
Already, GAN gets most of its revenues in the U.S. In its fiscal first quarter, 81 percent of revenues came from the U.S. And revenues on a like-for-like basis rose 64 percent.
GAN’s model is simple, recurring revenue. It gets 7 percent to 10 percent revenue share from clients using its iGaming and online sports betting platforms.
The company projects $37 million to $39 million in revenues this year. However, Chad Beynon reported that GAN may be near to signing a Tier 1 client whose revenues would be $300 million to $400 million a year. In other words, GAN might be one client away from doubling annual revenues even above its current fast pace of growth.
In addition to riding the sports betting and iGaming proliferation, GAN seeds its future harvests through simulated gaming. Under this program, GAN runs free-play online gaming for casinos, thus positioning itself to turn on a ready-made real-money client when online gaming is legalized in that casino’s jurisdiction.
At present, GAN has little analyst coverage beyond Beynon. He has a buy rating and $29 target on GAN, and calls it his top iGaming pick given its hyper-growth, $62 million in cash and no debt.
However, given its business model and the vast growth potential of sports betting and iGaming, it’s easy to see his forecasts as just the beginning.
