Whoa, Nellie!
There is a lot of justifiable excitement about the proliferation of sports betting and online gaming in the United States, but investors might want to take a deep breath and then a fresh look at the prospects.
U.S. sports betting is a $1.4 billion revenue business. No doubt it will grow. Estimates of $13 billion or $14 billion have been common. A 1,000 percent increase in market size should be good enough, but now we are seeing estimates of $18 billion, $20 billion, $25 billion, even $30 billion. Combined with online gaming, some forecasts exceed $50 billion.
To give you some idea how unreal the higher forecasts might be, Deutsche Bank gaming analyst Carlo Santarelli calculates that to get to $20 billion, every American adult would have to bet, and at a rate 65 percent higher than the $51 per capita average in New Jersey.
We don’t know how many states ultimately will legalize sports betting, and include online betting, but you can bet it won’t be 100 percent. And you can bet it won’t happen overnight. The biggest states (California, New York, Texas, Florida) are not shoe-ins.
Santarelli calculates a $10.4 billion addressable market that assumes 69 percent of Americans will have access to legal sports betting.
Then there are the valuations being given to sports betting operators.
Those who scratch their heads over Tesla’s market cap being greater than all of the world’s major car companies combined, even though they produce almost 200 times more cars than Tesla, don’t have to worry about gaming being left out.
Gaming has its own astronomically valued company—DraftKings.
The company that even bullish analysts do not expect to become profitable until 2023 has a market cap of $17 billion, which is bigger than the entire U.S. sports betting industry’s likely revenue that year.
Analysts have targets that value DraftKings as high as 45 times future EBITDA. Even the sober-eyed Santarelli’s $48 target is 25 times his 2027 EBITDA forecast.
Now, DraftKings is a fine company and a pure play on sports betting. It is the market share leader and it will be no surprise if it stays on top.
But there are issues to consider that may moderate one’s view of the stock’s future.
Consider competition. Flutter’s FanDuel is a worthy competitor. Caesars has William Hill’s sportsbook network and expertise and its own database of more than 60 million gamblers. Penn National has the 60 million-plus Barstool Sports users and its own player database. Rush Street and Golden Nugget have proven they are adroit online operators, and affiliate companies are ready to drive players to other operators.
In other words, DraftKings maintaining its market share is not guaranteed.
Market size. As mentioned, some projections are pretty wild, and there’s a big difference between calculating 40 percent of a $10 billion market and 40 percent of a $25 billion market.
Perhaps most important and least discussed – six and seven years from now is not predictable. Life isn’t as simple as projecting a big market, assigning DraftKings something like a 40 percent share and then doing a multiplication that even a third grader can perform.
The fact is the future is unpredictable.
Look no further than 2020 for instruction.
The outlook was universally rosy in February. And it wasn’t speculation. It was signed-on-the-dotted-line certain. Las Vegas had an extraordinarily strong convention calendar lined up. The NFL was going to bring 700,000-plus visitors in April. The NFL Raiders were scheduled to fill Allegiant Stadium with 65,000 free-spending fans for at least eight weekends. Legalized sports betting was proliferating. Company after company after company issued bullish projections with facts to back them up.
One month later, it all vanished.
Does anyone believe the next six or seven years can be projected out on a straight line?
We know that U.S. sports betting and iGaming will grow. We can make some educated guesses as to a range in the ultimate size of the market. We also know the current industry leaders and can make educated guesses about their future market shares.
But this may be a case where investors find it better to buy a basket of stocks than to put all of their eggs in one basket.
