Rampant speculation that the 2020 college football season was on the verge of being canceled (the Big Ten and Pac-12 have since punted on their respective fall seasons) appears to have sent several sports betting stocks tumbling on Monday (a similar occurrence took place last week when it appeared as if the Major League Baseball season might be called). DraftKings (-7.2%), Penn National Gaming (-7.3%), Flutter Entertainment (-2.9%) and William Hill (-2.8%) all finished down on the day (DKNG, PENN and FLTR made were up slightly on Tuesday). College football is responsible for roughly 12% of annual sports betting revenues, so it makes sense why retail investors were seemingly spooked by the flurry of ominous reports. But Chris Grove (gaming industry analyst, Eilers & Krejcik) said there is a “disconnect” between those trading on news of the postponed fall sports season and the reality of the sports betting business. “DraftKings was never built to be profitable in 2020 (the others weren’t expecting their U.S. sports betting businesses to be either),” he said. “So, the idea that a short-term revenue hit should somehow materially impact the value of the company doesn’t make a whole lot of sense. And all of these [companies’] valuations are based not on what they have done, but their long-term prospects [in the market]” (think: 2023 and beyond).
Our Take: The volatility surrounding DraftKings, Penn National Gaming, Flutter Entertainment and William Hill can be attributed (at least in part) to the outsized presence of retail money in the market. ‘Dumb money’ sees that with COVID-19, sports betting (and mobile gaming) are really the only engine-drivers for these businesses right now. Thus, selling out of fear of an anticipated short-term revenue shortfall makes sense. On the other hand, institutional money, which knows sports betting is a long-term play, is not exiting.
Sports betting is a long-term play because “as we sit here today, we might not even be in the first chapter of the U.S. sports betting [story]. It might be better understood as the prologue,” Grove said. California, Florida, Texas and New York (outside of a few brick and mortar locations) are all still without legalized sports wagering and “whomever the eventual market leader is, probably has [only] realized 10%-15% of the total market that they will eventually participate in.”
If the sell-off was in fact driven by the news surrounding college football—it’s hard to know for certain what is moving the markets—Dustin Gouker (Head of U.S. Content, LegalSportsReport.com) said it was “irrational,” even by day-trader standards. While wagering on college football represents +/- 12% of annual sportsbook revenues (that number varies market by market), it’s highly unlikely the industry would experience a decline anywhere close to that magnitude. That’s because bettors have proven they’ll migrate at least a portion their action to other sports (think: NFL games, NBA and MLB playoff games). Gouker estimated during the tail end of the sports hiatus (as sports like NASCAR and golf returned), that sportsbooks saw roughly 25% of the wagering activity they typically would draw during the month of May or June.
Another reason the sell-off lacked sense “is when you [drill] down, a short-term problem within a single sport is not really material to [most of] these companies’ businesses right now [as a percentage of overall revenue and profit],” Gouker said. Flutter and William Hill are internationally based and their U.S. revenues are “pretty small, relative to what they generate throughout the rest of the world” (so neither should take a tremendous hit). And Penn National Gaming—“a very large company—generates almost none of its revenue from sports betting. Even once the Barstool app launches (expected before the end of Q3), it’s going to take some time before sports betting is a material part of [their] revenue.” DraftKings (a pure-play sports betting outfit) will certainly feel the greatest impact of a lost college football season, but Gouker reminds, “[They have] an online casino business that is going to be as material as their sports betting business real soon” (which retail investors seem to be undervaluing). Flutter and William Hill also have online casino businesses that “generate a decent amount of revenue.”
None of the companies cited are expected to experience financial issues as a result of the revenue shortfall. A credit analyst we spoke to said, “Back in March and April—during the depths of COVID—[brick-and-mortar operators] raised a lot of cash by drawing down on their revolvers. They were planning for a doomsday scenario. No one was really expecting or planning [for sports to return], and if they did that would be sort of a cherry on top. So, they all now have the liquidity needed to make it through.” Of course, DraftKings does too after going public earlier this summer. It’s worth noting that with the cash on hand and just a limited number of states offering mobile sports betting, cancellation of the NFL season (which brings in 2x-3x what college football generates in revenue) “probably wouldn’t move the needle one way or the other for these companies, either.”
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