24 January, 2022

Market mania; bull, bear or bubble?

Lee Richardson MBA, CEO of Gaming Economics and Co-Founder of The Big Betting Balagan, believes valuations will only go in one direction during 2022

Warren Buffet once said …never invest in a business you cannot understand…" Having famously steered clear of the technology sector when choosing his investments, one wonders what he would make of our sector, especially during the past year or so.

One of the most dynamic industry themes of the last 12 months, or more, has been the market performance of those listed entities exposed to the online betting and gaming sectors in both the US and Europe and, in particular, New York and London.

An inventory of the world’s largest listed gambling stocks, published late last year, showed the top five US-based gambling stocks had a combined market cap of around  $88bn. By contrast, the value of the five leading European-listed gambling stocks was around $75bn.

To put all of that into context, their combined value (that’s 10 industry giants, collectively worth $163bn) was just over half the market capitalisation value of Netflix….

Tellingly, while none of the leading US stocks have any material interests in Europe, all the European operators have commercial exposure to the US. A clear case of “Go West, young man” in a post-PASPA world, surely.That expansion has certainly been boosted by the ‘regulatory-drag’ factor, and associated uncertainty, in ‘home’ markets such as the UK, Italy and Germany.

The resultant dynamism of that US market cap measure has been dramatic in the past two years or so, for a whole variety of reasons, but so much more than ‘just a pandemic’. Indeed, terms such as ‘over-blown’, ‘over-hyped’ and ‘over-valued’ have been levelled at the US sector, often with validity.

Interest in the US sector has clearly been boosted – as have some valuations – by the creation of Special Purpose Acquisition Companies (SPACs), a sector mechanism rarely noted pre-PASPA. According to Sportico, we’ve seen more than two dozen SPACs created to focus on the gambling sector. Some of these appear, to this observer at least, purely speculative vehicles searching for unspecified opportunities in a fast-developing – and highly demanding – landscape.

Have we already seen some less-than-well-informed investors step in? Probably. Are there enough proven, industry-experienced and in-market leaders, managers and staff to service this new demand? Certainly not.

Market volatility is another reality; Wagers.com Earnings + More, an industry results newsletter, reported all of the following on just one day late last year; GAN down 29% in a single month, with Genius Sports similarly down 24% (and down 60% on its float price); Gambling.com was down 16% in a week, with DraftKings down 11%, Penn National Gaming down 10%, as was Caesars, all over the same period. Gaming Economics calculated these collective ‘losses’ to total more than $5.9bn. Ouch.

In early December, a spat played out on CNBC between short-seller Jim Chanos and DraftKings CEO Jason Robins, who rejected Chanos’ charge that the economics of its business was “complete (sic) and totally
insane”. Double ouch.

None of this comes as a surprise to new FanDuel CEO Amy Howe, who told the Financial Times in October last year that the battle to seize market share is not sustainable and will lead to the failure of some operators. “There are too many competitors right now to sustain this level of spend,” she said. FanDuel is owned by Dublin-based, London-listed Flutter Entertainment, which has spent more than $1bn in marketing since 2018, to gain its market-leading position.

This sentiment is shared by industry suppliers, too, as Hessi Mocca, the new head of IR at Nordic-listed Gaming Innovation Group (GiG) recently explained "…we didn’t look at the US market because we didn’t have the economic tools to buy anything in the US. But the honest truth is everyone is buying into the US at high multiples and forgetting the European market."

Another factor, perhaps underappreciated in the US, is the symbiotic, and highly positive, relationship between sports betting and iGaming.

In fact, US online iGaming revenue (GGR) surpassed online sports betting revenue in Q3 2021 ($938m v $886m), and was almost level on a 2021 YTD basis ($2.62bn v. $2.74bn). Considering the significant disparity between the number of states that allow sports betting (28 and counting) and the handful of states that currently permit iGaming (just 4), Gaming Economics believes the scope for the latter vertical to expand considerably, from 2022 onwards, is obvious and – perhaps –  imperfectly understood by the wider market. Such imperfections always offer opportunities to the enlightened.

Such expansion would more likely benefit those listed operators and suppliers already highly experienced with iGaming. From overseas experience gleaned, over two decades, the likes of Entain, Flutter Entertainment and soon-to-be-acquired Playtech all immediately spring to mind. Privately owned behemoth bet365 is also quietly stalking the US market.

Might 2022 be the year that iGaming starts to get the proper US profile it deserves, with valuations better reflecting the benefits of delivering both to informed, and satisfied, consumers? This industry investor certainly thinks so.