When does US sports betting need to start showing a profit?


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The US sports betting market has hit its first real speed bump.

After a few years of stock upgrades, all-time highs, and triple-digit growth, the reality has arrived.

Penn National Gaming and Draft kings are both down more than 50% from their highs and sports betting stocks are under pressure across the board.

Analysts are increasingly voicing concerns about profitability. UBS for example recently downgraded DraftKings because it probably won’t make a profit until 2024.

Cash campfire

In the third quarter alone Draft kings recorded a net loss of $ 546 million. In nine months of the year the company made a net loss of $ 1.19 billion.

It’s not just one Draft kings Problem. FanDuel expected a $ 360 million EBITDA in FY21 while BetMGM burns nearby $ 100 million a quarter.

Elsewhere, Wynn recently decided that it is not lfurther stomach-like losses and promised to cut spending.

So how long can US sports betting be burning money before investors get cold feet?

Original recipe

“I think investors will accept total losses as long as operators can clearly demonstrate that they are making profits in more mature states like NJ and PA,” said Numis securities analyst Richard Stuber.

“William Hill has split its US division into newly regulating states and existing states. I think the operators should start doing something similar – not just a slide on a particular market in the presentation package. “

What can we learn from New Jersey?

As CEO, DraftKings is obviously already thinking about it Jason Robins said the company had reached profitability in the Garden State after the third quarter.

“It’s still been a little over three years and we’re still seeing really strong user growth there,” added Robins. “If you look at the iGaming market, which is currently in its eighth year, it is still growing 30% + percent. I think you will grow in New Jersey for many years to come. “

Hell in the details for US sports betting

It’s a bit more complex than just “Are NJ clients profitable?” Investors also need to consider:

  1. Are newer customers less valuable than early adopters? Newer customers tend to be occasional customers, which could change the way the lifetime value is calculated. Penn CEO Jay Snowden argued earlier this year that the industry’s LTV numbers were incorrect. “Lifetime value is something that gets tossed around a lot,” said Snowden. “And it’s interesting because people calculate the lifetime value as if that customer will stay with you forever.”
  2. Would NJ still be profitable if 25% of receipts disappear when new York Online sports betting goes live? States like Arizona and Connecticut also benefit from betting tourists. Do some addressable market industry estimates count double for some bettors?
  3. Are the profits enough to cover all overheads and business expenses that are not country-specific? What scale is needed if not?
  4. Would NJ be profitable without an online casino and poker? The expansion of online gambling has been much slower than that of sports betting and there is no guarantee that it will ever reach the same level of coverage across states.
  5. Would NJ be profitable with a higher tax rate? at 14.25%, NJ is one of the easiest tax systems to use in the United States. What are the numbers at Pennsylvanias 35% Tax rate for example?

Long catwalk for US sports betting

The good news is that the underlying metrics are in the early (and new) states are very strong. There was a reason investors were so optimistic in the first place.

Eilers & Krejcik Rector Chris Grove suggested in a recent podcast that the mood change was an “over-correction”.

“Player ratings suggest the US market will still be one of the most productive markets in the world,” said Grove.

Businesses should also have a decent runway to prove themselves.

As one analyst said LSR: “In a market that is trending up, which means the SPX is rising every day, people are being patient longer than usual. I don’t see a big shift in this type of climate towards people focused on profitability … even if some are certainly frustrated. “

A story of two markets?

Meanwhile, profitability pressures have created an interesting split in US sports betting.

The likes of PointsBet and Wynn are looking for alternative strategies to compete while burning less money.

PointsBet will invest in products while Wynn will try to serve high rollers. Penn also continues to cap external marketing spend as the company grows Bar stool sports betting.

On the other side of the coin, DraftKings has no plans to slow down its investments as its models state that new customers will pay more than just their initial cost. BetMGM and Caesars also seem to be in expansion mode.

Will investors prefer one approach or the other? That remains to be seen, but the days when company valuations rose just because they got exposure to sports betting may be over.

The winners and losers of the future will be decided by execution rather than optimism.

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