Sports betting stocks have soared to open the year, with pack of long beaten-down companies—DraftKings, Genius Sports , Sportradar, Caesars Entertainment—all gaining more than 20% to open 2023. Not far behind are sports wagering specialists Penn National Gaming, Rush Street Interactive, Churchill Downs and Super Group, all of which posted double-digit gains. They helped lead the Sportico Sports Stock Index to a 17% gain in January, the best month for sports stocks in more than two years.
For sports betting stocks, the new year has been a chance to turn the page after a brutal 2022, where the sector lost more than 40%. But while some of the gains could be explained away as typical new year optimism pushing stocks higher, the move is primarily being driven by sports wagering companies starting to show their value proposition to Wall Street, according to Will Hershey, the CEO of Roundhill Investments, an exchange-traded fund sponsor whose products include the $150 million BETZ, its sports betting ETF.
“We’ve seen a less-euphoric market that has been focused on profitability. The question for sports betting stocks has been ‘when do we get there?’” said Hershey, in a phone call. “Across the board there are things to be excited about. Caesars would have been profitable in the fourth quarter if they didn’t have that bet go against them from Mattress Mack on the World Series. FanDuel, MGM, Caesars are all targeting profitability by the second half of the year.”
There’s likely some lift from retail traders, too, as the Super Bowl and March Madness grab mindshare. “People in their everyday life interacting with these platforms are probably also investing in them,” added Hershey.
The promise seen in sports betting in recent years may be coming to fruition. Next week’s Super Bowl could draw more than $1.1 billion in legal bets, according to PlayUSA, an industry publication.
The difference today is that wagering stocks are much cheaper than they used to be. DraftKings, for instance, traded at 300 times its book value at times in 2020, according to data from S&P Capital IQ. Nowadays, DraftKings trades at less than five times book value, even after shares gained 33% in January. That has some on Wall Street starting to suggest betting stocks could be in value stock territory. “We understand valuation is a concern for unprofitable companies in this macro environment but like the long-term value proposition trading at under 4.0x our 2022 sales estimate,” said CFRA analyst Zachary Warring, in a DraftKings research note last week.
It helps that sports-related companies are simplifying their story to institutional investors. Two weeks ago, Genius Sports streamlined its balance sheet by converting all the warrants outstanding from its 2021 SPAC merger. SPAC warrants, the right to buy shares in the resulting business, were once a profitable perk for investors. But in the bear market they’ve been a millstone. Accounting rules require companies to count the paper gain or loss in the value of their outstanding warrants every quarter, often causing big swings in profit and loss measures that have nothing to do with the actual business. A solution, for those who can get shareholders to agree, is to swap the warrants for shares.
Genius gave about a quarter of a share for every outstanding warrant, which could have been swapped for a share each once Genius reached $18 a share in the future. “[Warrants] come with a bit of legal and accounting complexity, and if we have an opportunity to get rid of that we will, which was one of the many reasons why we chose to do this transaction,” said Genius head of investor relations Brandon Bukstel in a phone call.
It is one step in getting Wall Street to better focus on the growth business of data and analytics in sports betting. Genius and rival Sportradar have faced constant headwinds since going public because some equity analysts aren’t convinced of the need for high-cost official data deals with leagues, and who are skeptical about why sports books would pay a premium for it in return.
“We're doing everything we can to simplify our story,” said Bukstel. “I do think that removing the warrants was an incremental positive for the stock, because this transaction was less dilutive than it would have otherwise been at higher stock prices. It opens a way for people to have one less thing to worry about for our stock.”
Genius shares gained 54% in January, closing at $5.50 each, making it the second best-performing stock in the Sportico Sports Stock Index. Sportradar added 27% to close the month at $12.65. Football-themed Hall of Fame Resort & Entertainment was the best performer of the month, rallying 77% to $13.68, benefiting from a relief rally after the business executed a reverse share split to end 2022. The reverse split, in which every 22 shares were exchanged for one share, removed the threat of delisting by the Nasdaq Stock Market for its low stock price.
All told, the 40-stock Sportico index closed January at 1,227, giving it the best percentage gain since November 2020, the peak of the last bull market. Only five sports stocks fell in the month. Four—Madison Square Garden Sports, Endeavor, Manchester United and Juventus—suffered only mild dips. The worst performer was FaZe Holdings, parent of esports outfit FaZe Clan. Shares of FaZe lost half their value in January, closing the month at 87 cents, a price that may open the door to its own delisting from the Nasdaq. After going public by SPAC merger last summer, FaZe has lost 96% of its value from its peak.
The Sportico Sports Stock Index is a group of 40 U.S. traded companies that represent the state of the sports business. The index includes betting, media, apparel and teams relying on sports for their growth. Sportico introduced the index in August 2020 at 1,000. It’s an equal-weighted index, meaning each quarter every component is reset to be an equal percentage. The benchmark index peaked in November 2021 at 1,763 and touched a low of 1,030 this past November. The 17% January gain for the sports index far outpaced the S&P 500’s 5% gain in January.