Online gaming is entering a new, more iffy stage in its development.
We’re past the heady days of stocks valued at 20 times some future revenues that might never be achieved. And several international companies that entered the U.S. have gone home chastened and poorer. Some have been bought out at prices far below their market values of a year ago.
What is left is a still-growing industry with revenues rising 20 and 30 percent a year and continuing efforts at geographic expansion, but with a lot more uncertainty as many remaining companies continue to lose money, taxes rise, U.S. and international regulatory environments risk turning negative and those new jurisdictions upon which so many of the still-rosy projections rest, well, maybe not so fast, if ever.
Indeed, it sometimes seems as though all of the brash, overbearing rush into iGaming will be its own undoing as some jurisdictions consider revenue tax rates of 50 percent and higher and new regulations may be adopted restricting everything from advertising to player access to bet limits and loss limits.
And remember, all the self-congratulation about responsible gaming programs won’t offset the political impact of sob-sister stories of people’s lives ruined by their easy access to online gambling. Politicians will jump on those stories in races to enact ever-more restrictive rules. Perhaps rightfully so.
The mood of regulators can be sensed to some degree in Brazil. Not since the U.S. digital market opened has there been as much excitement about new frontiers than is currently the case in Brazil. Yet, even before the market opens on New Year’s, government officials are warning that iGaming could be banned if it preys on those who can least afford gambling losses or who are susceptible to gambling addiction.
The one argument the industry has in its political favor is to point to the boogeyman of unlicensed and offshore operators and say, “See. If you’re too hard on us, you’ll just turn players to the unlicensed operators where there is no consumer protection for them and no tax revenues for you.”
That argument will ultimately work. In short, the digital gaming cat is out of the bag and isn’t going back in.
So, for investors, the questions come down to which business models and which practitioners of those models will succeed when the dust has settled.
There’s one group of sure winners—the “big pure players.” That is a small group. In the U.S., it’s FanDuel and DraftKings. This pair enjoys the majority of U.S. digital gaming revenues. Add in the MGM-Entain joint venture BetMGM, and it’s a tri-opoly, if there is such a thing.
Of note, FanDuel is 95 percent owned by Flutter, which has years of profitable experience under its belt in the U.K. and Ireland.
What might be called the “big hybrids” are another category. Among these land-and-online combinations are Caesars and Penn Entertainment.
Caesars earned $52 million in EBITDA from digital in the third quarter, up from $2 million last year and a bright spot compared to a minus number for many competitors. On the company’s conference call, CEO Tom Reeg colorfully said he will be surprised if Caesars doesn’t earn well over its goal of $500 million annually from digital.
Penn is the most binary—to use that overused word—of the operators, as it is making a big investment in ESPN Bet after losing a ton of money in its earlier online gaming trial with Barstool Sports. However, for investors there is some security in the stock given that the share price today is lower than the value of its proven brick-and-mortar business alone.
There is one small “digital pure play” that has revived some of the earlier enthusiasm over its prospects—Rush Street Interactive. Analysts now see the stock hitting the mid-teens after plunging to under $3 last year from over $21 in 2021. A projected 10-fold rise in full-year EBITDA combined with share repurchases and its overall potential to grow into a big player will do that for a stock.
A third category of operator that has some promise is what we might call “small but smart” – Boyd Gaming and Churchill Downs are two such examples. Boyd is steadily and prudently building an iGaming business in the U.S. It also has a kicker—it owns 5 percent of FanDuel. Churchill has forgone all-out iGaming in favor of a tailored approach. It also has a kicker, its longstanding account wagering business, Twin Spires.
There are a lot of other companies in the space, from affiliates to data providers to games providers to software providers.
But if you’re looking for operators, those mentioned above merit exploration.
