Online Gambling Is Here To Stay: Flutter, DraftKings Dominate The Market

In my September 2022 column, I noted that single-game sports betting had been legalized in most Canadian provinces and advised that instead of wagering, patient investors would be better off buying the shares of the sportsbooks’ parent companies. After all, the house always wins in the long run. 

Of the companies mentioned then, shares of DraftKings Inc. had climbed by 183% as of February 8, MGM Resorts was up by 56%, Caesars Entertainment was 37% ahead and Rush Street Interactive was up by 60%. Penn Entertainment went into a long slump, however, and fell 18%. There are no total returns to mention since none pay a dividend. The two gambling Exchange-Traded Funds (ETFs) described 18 months ago have climbed: units of the Roundhill Sports Betting & iGaming ETF are up 35%, while the VanEck Gaming ETF is up 40%.

The gambling industry is divided into sectors based on how bets are made—in person and online—and on whether the gambler wagers on sports or casino games. The sports betting sector includes fantasy sports, in which contestants build teams of real players and derive paid results from the performance of their fantasy teams.

Of course, some gamblers do it all, visiting casinos, placing bets on their computers and phones, and wagering on both sports and casino games, and such regular customers help boost revenue and earnings for gambling companies and their investors. However, between three and five out of each 100 gamblers develop an addiction that wreaks as much havoc on their lives as drugs or alcohol, the Addictions.com site says. Young adults between 20 and 30 are most likely to be problem gamblers and the likelihood of someone developing gambling problems jumps dramatically if they already have other addictions or suffer from depression, anxiety or post-traumatic stress disorder, the site warns. This is why gambling stocks don’t appear in any funds focused on Environmental, Social and Governance (ESG) investing.

Ethical qualms aside, Statista, an online data gathering platform based in Germany, says the online gambling market in Canada should generate revenue of US$4.19 billion in 2024, with an annual growth rate of 6.84%, resulting in a projected market volume of US$5.46 billion by 2028.

The U.S. online gambling market is of course larger, helped by a 2018 Supreme Court lawsuit in which states became free to legalize sports betting.

By the end of November 2023, the last month for which complete data was available, Americans wagered US$106.09 billion in the legal sports betting market, the American Gaming Association said in a 19 January 2024 release. Revenue from sports betting reached US$9.20 billion in the first 11 months of 2023, up 46.6% over the same period of 2022. While the year-to-date trend in sports betting was strong, the rate of growth slowed in November, the AGA said.

The largest and most established sports betting companies are based in Europe, where sports betting has been legal in the United Kingdom and Ireland since the 1930s and European countries established regulated markets in the 2000s.

The barriers to entry in the online gambling sector are obviously lower than in the brick-and-mortar sector, as iGaming competitors must only build a website instead of hotels and resorts. The ease with which competitors can roll out new brands means digital gambling companies must pour millions into advertising and promotion to win and keep market share, gobbling up revenue and delaying profits. 

Online gambling companies are legally restricted to operating in certain U.S. states and other jurisdictions, although the number of jurisdictions legalizing online gaming has been steadily growing as governments enjoy the tax revenue. At first blush, it appears online gamblers could easily bypass local laws by using a virtual private network (VPN) to conceal their real IP address and physical location. However, online casinos and sportsbooks often require winners to verify their identity, at which point gamblers using VPNs run the risk of having their account suspended or their winnings confiscated, the BetMGM site warns.

Here is a brief look at some investment ideas in the online segment.

Flutter Entertainment PLC (FLUT/NYSE)

Flutter Entertainment, based in Dublin, Ireland, is the parent company of FanDuel and other global gambling brands. Flutter describes itself as the largest operator in the online sports betting industry, with its fiscal 2022 revenue 1.8 times greater than its next largest competitor. The company has 22,000 employees and a market capitalization of US$36.5 billion. Roughly 38% of its 2023 revenue came from the United States, 24% from the U.K. and Ireland, 12% from Australia and 26% from customers in Italy, Turkey, India and Brazil. Flutter says it has plans to take a big share of what it sees as a US$40.5 billion total addressable market in the United States by 2030.

Flutter shares began trading on the NYSE on 29 January 2024 under the ticker FLUT, replacing its American Depositary Receipts. The ADRs had traded at US$200 between April and July 2023, then plunged 20% to the US$160 level last fall before surging back to US$200 in January.

In its 2023 trading update released on 18 January 2024, Flutter reported that total revenue climbed 25% in 2023, with sports up 23% and gaming up 29% in constant currency. The number of average monthly players (AMPs) climbed to 12.32 million from 10.25 million. FanDuel remained the Number 1 U.S. sportsbook with 43% Q4 gross revenue market share, (51% net revenue share). Flutter’s fourth quarter net revenue came $ 225 million below guidance, hurt by what it called “customer-friendly sports results.” 

DraftKings Inc.

DraftKings is a digital sports entertainment and gaming company that describes itself as the only U.S.-based vertically integrated sports betting operator, serving daily fantasy sports, regulated gaming, and digital media in several U.S. states and in Ontario. The company has no brick-and-mortar locations, which means it has no retail presence.

In April 2020, DraftKings went public through a reverse merger with Diamond Eagle Acquisition Company a special-purpose acquisition company (SPAC) and SBTech, a Bulgarian tech company. The company has a market capitalization of US$20 billion.

In its third quarter 2023 results released 2 November 2023, DraftKings reported a huge 57% jump in revenue to US$790 million vs. US$288 million for the same quarter of 2022. The company said it expects to generate US$3.62 billion to US$3.72 billion in revenue for its 2023 fiscal year, equating to year-over-year growth of 64% to 66%. Despite the revenue gains, the company has yet to post earnings and lost US$283.1 million or 61 cents a share in its third quarter, although this is much better than Q3 of 2022 when it lost US$450 million (US$1 a share). For 2024, the company said it expects earnings before interest, taxes, depreciation and amortization (EBITDA) of US$350 to US$450 million on revenue of US$4.5 billion to $4.8 billion.

The company’s balance sheet is strong, with total assets of US$3.86 billion against total liabilities of $3.06 billion.

VanEck Gaming ETF (BJK/NASDAQ)

Launched in 2008, this fund tracks the Market Vectors Global Gaming Index, made up of casinos and casino hotels, sports betting, lottery services, gaming services, gaming technology and gaming equipment. The fund has US$48.4 million invested in 40 holdings, with roughly 50% held in U.S. companies and the rest well diversified among a broad assortment of countries: Australia, Ireland, China, Sweden, Malaysia, Britain, France, Japan, Greece, Italy and South Korea.

The fund’s largest holdings include a 9.4% weighting in Flutter Entertainment PLC, 7.4% in Vici Properties Inc., 7.1% in Las Vegas Sands Corp. and 6.5% in DraftKings Inc. The constituent holdings have an average market capitalization of US$17.9 billion and trade at an average of 20.6 times 12-month trailing earnings and 2.61 times book value.

The fund carries a net expense ratio of 0.72%.

Roundhill Sports Betting & iGaming ETF (BETZ/NYSE Arca)

Launched in 2020, this fund has US$99 million invested in 33 gambling and iGaming stocks, with a top 11.3% weighting in Flutter and 8.9% in DraftKings.The fund’s unit price surged to more than US$30 during the pandemic but has since fallen and trades in a range of between about US$14 and $17. BETZ carries a management expense ratio (MER) of 0.75%.

Conclusion                              

An increasing number of jurisdictions are permitting online wagering in both sports and casino games, providing a catalyst for growth in the gambling industry and opportunities for investors. There are risks, however, as there are few barriers to entry for new online gambling companies and nothing to prevent established giants from launching new brands or acquiring smaller ones. Both Flutter and DraftKings may lose market share to competitors such as Penn Entertainment (PENN/NASDAQ) and privately owned digital sports platforms such as Fanatics, along with established casino giants MGM Resorts International (MGM) and Caesars Entertainment Inc. (CZR). Investors interested in the sector are likely better off holding the ETFs.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca