While the broad stock market has been dancing at record highs, the air has been let out of an oh-so-recently high-flying group: U.S.-listed sports betting and iGaming plays.
As of this writing, DraftKings is down nearly 40 percent from its 52-week high, and Penn National has been cut in half.
Smaller companies have been hit even harder. iGaming-focused Rush Street Interactive and Golden Nugget Online are down around 60 percent. GAN, which dramatically raised revenue guidance and crowed about the greater-than-expected success of its new B2C business, is down 50 percent.
Even NeoGames, which actually is profitable and is supported by multi-year contracts with state lotteries, is down nearly 30 percent.
The most recent example of this falling-out-of-love phenomenon is Score Media and Gaming. The Nasdaq and Toronto-listed company was the first to report June quarter earnings. Revenues rose significantly, but the stock tanked 10 percent. Score is down 64 percent from its high, even though Ontario will launch sports betting this fall and everyone knows the Toronto-based company will benefit greatly as the hometown favorite.
Score didn’t help its cause among investors, losing more money than last year thanks to start-up costs in new markets and unlucky sports betting results.
Of course, losing money is what North American sports betting and iGaming operators do. Like the dot-coms whose stocks collapsed a generation ago, they’re spending prodigiously to establish market share. At some point, investors need to see profits, or at least a credible pathway to profitability—and sooner than someday.
That might be a big reason why stock prices are descending from the stratosphere.
Another reason might be the dawning realization that the big, multi-property, multi-jurisdictional casino companies like Caesars, with tens of millions of players in their databases and financial resources in the billions of dollars, will win over the long term.
One can envision a future dominated by DraftKings, FanDuel, Penn National, Caesars and MGM-Entain with a few niche survivors like Score and Rush Street.
Thus, in second-quarter earnings reports and investor conference calls, it will be worth it to listen to and ascertain the route to profitability. Because investors do not live by revenues alone.
And About Those Margins…
In the land-based world, the theme of quarterly earnings reports and outlooks will be business volumes and margins, much as in the last quarter.
So far, it appears many casino companies will report earnings that beat already raised expectations.
Normally, that would cause stock prices to jump, but there will be the question of sustainability. Can business volumes continue to grow, or do they ebb as pent-up demand eases and as stimulus checks and generous unemployment benefits end?
Can costs remain low if companies have to run up expenses to serve more customers? Will marketing costs creep back up as the competitive environment intensifies?
Or have casino operators, like managers in so many industries, truly learned how to operate more efficiently and effectively?
Their responses will be yes, yes, yes. And the second-quarter numbers and reports of current business trends seemingly bear that out. But our guess is that it will be two or three quarters before we know the full answers to those questions.
