Sports Betting Stocks Trade Up After Super Bowl Thanks To Inflated Numbers
Sports betting stocks were expected to respond positively to all of the Super Bowl buzz, and early indicators do suggest that the hype around the season finale drove share prices up somewhat for most publicly traded brands in the space.
However, these hype-driven trends often caused by lofty handle expectations have proven to be dangerous for the industry that likes to write checks it has difficulty cashing.
Estimates from the American Gaming Association made headlines this year projecting the ‘most bet Super Bowl ever,’ and while regulatory expansion has made legal wagering available to millions across the country, some suspect that half of the projected $7.5 billion handle will come in the form of off-shore bets or wagers between friends.
It’s not the first time sports betting operators have leaned into optimistic statistics, with DraftKings using their investors day presentation as the platform to increase the potential North American gambling market valuation to $67 billion, a number that was meant to grab headlines and divert attention away from the excessive spending.
Average investors see these headlines and jump before asking the right questions, and given the proximity the product has to the sports industry in general, casual fans have been coerced into buying into the hype of an industry that seemingly can’t fail.
A $7.5 billion handle on a single game… Sounds amazing, right? Well, you would be shocked to see how little of that actually ends up in the profit column.
If we generously assume that $4 billion is wagered through these legal outlets and then factor in the perceived win percentage of 7%, the books are left with just shy of $300 million. Divide this up between a dozen platform operators, remove state taxes (51% in New York alone) and see what you are left with.
Oh yea, and we didn’t even discuss operating costs.
In essence, it is not only possible but likely that some sportsbooks operated at a loss on the biggest day of the sporting calendar.
DraftKings stock (DKNG) has fallen 61% over the last six months, largely in part to investors’ growing concern over the brand’s tendency to overspend on just about everything. In the arms race for market share, DraftKings, FanDuel, MGM, and the other sports betting giants have aggressively marketed their products to the point where acquisition costs outweigh the overall return.
This strategy has become a dangerous game of chicken, with operators waiting for the competition to flinch first.
So why are we still high on this industry long term?
Well, it is this high-stakes game of poker that keeps us extremely engaged at the current price point. As smaller shops begin to tap out, larger groups will be able to lower operating costs and acquisition spending. Marketing rates will also drop, as the landscape becomes less competitive.
It could easily be 4 or 5 years before sports betting investors see DraftKings turn an actual profit, and it could still be a solid buy at the current price point for those willing to wait. With speculation of a potential big money buyer or a future merger with a competitor, this timeline could quickly shorten.
Let this current spike play out and once again settle after the company’s numbers are released later this month. Buy in at the dip and ride it through the start of March Madness with the plan to either sell on the spike or hold long-term.