Sports Betting Stocks Freefall: Should We Be Concerned?
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The excitement surrounding the sports betting industry has been reaching new highs, and every time a new state announces legislative action, it’s cause for celebration. Investors have been bullish on this new industry, but lately, publicly shared sports betting companies have experienced significant sell-offs from their shareholders. This dissonance should lead us to ask why; is there a reason we should be tepid about the sports betting industry moving forward?
Rampant Stock Sell-Offs
DraftKings (Nasdaq: DKNG), Penn National Gaming (Nasdaq: PENN), and PointsBet Holdings (OTC: PBTHF) have all dropped more than 50% from their respective all-time highs in stock pricing. Meanwhile, BETZ, Roundhill Investments’ sports betting and iGaming ETF, has fallen over 26% from its all-time high in April 2021. Context is important here as PENN was a single-digit stock as recently as March of last year and is now trading at around $50. DKNG’s SPAC opened at just under $10, as well, and it’s now trading at about $30. It’s also worth noting that other higher beta (variance) stocks have also seen massive sell-offs this year as inflation and other economic concerns have led investors to pursue safer value.
Major Concerns for Investors
The most important topic of conversation for institutional investors has been the “cash burn” taking place as sportsbooks have spent large sums of money on advertising to target customer acquisition and retention without much concern for profit margins. In New York, this will become an even bigger issue with the state’s country-high 51% tax rate for licensed sports betting operators. Jason Robins, CEO of DraftKings, tweeted that “it’s not about the money,” but about “achieving our goal of $1T market cap by 2032.” Robins believes that DraftKings can become profitable in New York within two to three years.
Sportsbooks hopes to eventually turn a profit despite the high tax rate in New York, but that won’t be possible right away. New York’s stringent regulations reminded investors that states believe they own sports betting, and they are often correct. Some of the sell-offs of sports betting stocks may be due to concerns over similarly high tax rates in new markets such as California and Texas, both of which have massive populations. However, Robins reiterated to investors at a summit on Tuesday that should not be an issue as California already has a proposed 10% tax rate written into proposed legislation.
DraftKings Stock Price Slipping
One of the more notable declines in stock performance as of late has been DraftKings, as shares dropped by about 26% in November and are down over 32% year-to-date. On November 5, DraftKings reported a larger-than-expected Q3 loss and shorter profit margins. DraftKings maintains a $28 billion market cap, but investors have expressed concern over high assumptions for market share and margins, particularly in the wake of New York’s outlandish 51% tax rate. Still, DraftKings stock is up 79% since the company went public in April 2020. Robins tweeted on Monday that the “haters” should “check back with [him] in 2025.”
To all the haters out there, we will see. Check back with me in 2025
— Jason Robins (@JasonDRobins) November 30, 2021
Other Stocks Slipping
In November, Penn National Gaming shares also dropped about 29%, putting the company down about 44% YTD. On November 4, Penn National lost $2.69 billion in valuation after earnings fell short of expectations. Penn, which owns a 36% stake in Barstool Sports, has also had to deal with the fallout of Barstool founder Dave Portnoy’s sexual assault allegations which seem to have since dissipated. Caesars shares were down just under 18% in November, but the company has had a strong 2021 and is up about 14% YTD on the strength of its impressive rebranding following the acquisition of UK-based sportsbook William Hill. Wynn was down just under 10% in November and over 31% YTD. MGM was down over 16% in November and almost 24% YTD.
Future Implications
As with any industry, the million-dollar question will always be whether or not companies can turn a profit in sports betting. However, we should be very optimistic about the trajectory of the business. New Jersey and Nevada have recently broken through the $1 billion handle threshold, Arizona’s launch has thus far gone swimmingly, and New York is on its way to being the biggest legal sports betting market in the country. Various research firms have estimated that the sports betting industry will surpass $28 billion by 2025. There may be hiccups along the way, but sportsbooks have shown that customer acquisition and retention are essential enough to forgo short-term profit margins in exchange for significant customer lifetime value. As more states launch their legal markets and sports betting becomes more mainstream, the stock prices of these companies should, in turn, grow exponentially.