We have a bullish view on the global sports betting and iGaming (online gambling) industries. We are most excited by the US market, where Goldman Sachs expects revenues to increase 23-fold from $2.3bn in 2020 to $53bn in 2033 – a compound annual growth rate of 27%. The key growth drivers are pent-up demand and an easing regulatory environment, which now allows individual US states to decide whether to legalise sports betting and/or iGaming. Morgan Stanley expects the number of states offering sports betting to increase from seven in 2018 to 39 in 2024.
There is now also greater social acceptance of betting on sports. Technological improvements have led to better product offerings, such as the wider availability of “in-play” betting (placing a bet during a live event), and a better overall user experience, such as live-sports streaming directly within sports-betting apps.
A cash cow
What makes this industry particularly interesting is not just its rapid revenue growth, but its strong conversion-to-earnings and free cash flow. High earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of 30%-35% will be driven by marketing and brand building, maximising customers’ engagement through various channels and platforms, and by technological efficiencies.
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Due to low capital expenditures, free cash flow and return on invested capital are very high. There are many ways to play this theme, including large firms serving consumers directly and “picks and shovels” plays providing the goods, services or technologies needed to make the final product.
DraftKings (Nasdaq: DKNG) has become the market leader in digital gaming, having started out in daily fantasy sports, where players compete against others by creating a team under a budget and earn points based on the real-world performance of the players. The company made strategic acquisitions and invested heavily in technology and acquiring customers.
It is targeting long-term market shares of between 20% and 30% in sports betting and 15% and 20% in iGaming, implying annual sales of between $5bn and $7bn and Ebitda of $1.7bn, compared with an expected Ebitda loss this year of $400m, estimates Goldman Sachs. The bank’s price target is $77, implying upside of 71%.
BetMGM’s market-leading joint venture
MGM Resorts International (NYSE: MGM) and Entain (LSE: ENT) have a joint venture called BetMGM. It boasts the leading market share in iGaming, one of the most profitable product categories.
BetMGM combines Entain’s technology with its wide customer base, top brands and bricks-and-mortar casinos of MGM Resorts. Thanks to start-up costs, it incurred losses of $100m in the third quarter of 2021, but the group is targeting long-term annual sales of $6bn.
Evolution Gaming (Stockholm: EVO) is a Swedish firm specialising in “live casino” offerings, using live dealers to provide a more casino-like experience. Its products plug into B2C (business-to-consumer) platforms, so it is a B2B (business-to-business) supplier, with Ebitda margins of 70%. It is one of the most profitable firms in the industry, and Ebitda is expected to reach $1.5bn in 2023.
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