Is the bear market finally over for sports betting?
Much of August was a long-awaited rally for growth stocks of all stripes. Stock market participants began to hope the end of the Federal Reserve Bank’s efforts to curtail inflation was in sight, given that rising interest rates slash the premium equity investors are willing to pay for shares.
The JohnWallStreet Sports Stock Index, the Sportico benchmark index, posted a 3% gain in August, led by a surge in companies dependent on sports betting, including Genius Sports (GENI, up 58%), FuboTV (FUBO, up 44%), DraftKings (DKNG, up 17%) and Sportradar (SRAD, up 15%). It was the second straight month of gains for sports stocks as the market seeks to reverse what had been a brutal run for betting share prices. The four stocks cited here lost on average 70% of their value from the start of 2022 to their low points of recent months. That’s $14.5 billion in market value that evaporated in the summer heat.
August recovered some of those losses and suggests Wall Street opinion has turned back in favor of sports betting. Strong quarterly earnings reports from DraftKings helped, as did good results from Genius and Sportradar, each of which also seems to be making headway against analyst criticism they’re paying too much for exclusive league data. Fubo, which went all-in on sports betting as a growth avenue when the sector was hot in 2021, helped its shares in a mid-month analyst day by refocusing on how its sports-driven streaming service benefits from cord-cutting. That, and a "first look" deal with actor and Wrexham AFC co-owner Ryan Reynolds, were heavily discussed. Fubo left sports betting until the end of the day—before returning to their deal with Reynolds.
Venture capitalists with a focus on sports betting are reemerging to tout their strategy, too, after lying low in recent months; private investments also suffered paper losses in tandem with the bear market. “Investors are looking to this period with excitement and optimism as they see massive opportunity for early-stage ventures,” one public relations representative for a large, sports-focused fund said in an email to JWS last week.
But other investors contend the rebound doesn’t mean sports betting is in the clear. “Despite the renewed optimism in markets, at Waterhouse VC, we remain relatively cautious on high growth equities, particularly those that are loss-making and require continued capital injections,” Tom Waterhouse said in an email to Sportico. Waterhouse’s betting-focused investment fund made 2,113% profit in three years entering 2022, buying into both private and public companies.
Waterhouse says the stock rally hasn’t erased the big concern investors have had around sports betting ventures: valuations. “Whilst many high-growth public equities are down over 80%, on a whole, high PE ratio companies trade at a 45% premium to their 20-year average. In contrast, low PE companies trade at a 15% discount to their long-term average,” he wrote.
Indeed, a look under the hood of the JohnWallStreet Sports index suggests a less convincing turnaround. Nearly every one of the 40 stocks in the index remain well off their highs of the past two years. The exceptions are Faze Holdings (FAZE), the parent of esports company Faze Clan, which gained 45% in the month; and Formula One (FWONA), which actually dipped 6% in August but set its all-time closing high of $63.18 a couple of weeks ago. The index itself closed August at 1,172, well below its peak at 1,763, touched in November.
August’s positive momentum still didn’t buoy sports betting across the board. There are nine betting stocks in the Sportico index, and five of them saw their shares decline in the month. The index’ worst performer was Rush Street Interactive (RSI), which shed 13%. Rush Street lowered its revenue guidance for the year by $20 million, to as much as $630 million, on potential consumer engagement concerns and a desire to be conservative about recently entered betting markets as the football season begins, said Oppenheimer analyst Jed Kelly in a recent research note.
Indeed, concerns are returning that sports betting companies will be forced to spend more to acquire customers again—after spending much of the year telling Wall Street they were pulling back in that area. Super Group (SGHC), the parent of global brand Betway, lost 3% in the month and was downgraded by Oppenheimer mid-month to "market perform" as the company’s second-quarter Canada revenue fell 18%. “We believe SGHC is becoming profitable quicker than its competitors on the company's ability to deploy its digital sports betting…” Kelly wrote, but its “largest fundamental risk is sustaining profitable revenue in Canada as the country shifts to a fully regulated market with well capitalized competitors.”
Such concerns, coupled with the Fed’s renewed statements that it intends to do whatever it takes to fight inflation, means August’s rally could lead to a September slump for sports stocks. Said investor Waterhouse: “We are positioned defensively.”