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While traditional gaming stocks continue to struggle, those with a sports betting connection are soaring.

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Gaming stocks have been recovering as the industry gradually reopened in recent weeks and months. Though still operating below capacity, business has returned, albeit at lower levels than normal.

The future remains uncertain. Bulls look to the industry fully recovering in 2022 or 2023, and are valuing stocks on those expectations. Bears note the millions of people who are unemployed and warn of a recession to follow the pandemic recovery. Skeptics might also question the wisdom of bulls valuing stocks based on estimates so far into the future.

During this time, there’s one kind of gaming stock that’s soared—those intending to capitalize on the emergence of sports betting and online gaming in the United States.

That potential has been well publicized, with estimates that sports betting will grow from $1.5 billion a year in revenue in the U.S. to $12 billion or $13 billion in several years, and some forecasts that online gaming will reach $22 billion.

The results of this anticipation have been nearly frenetic. Consider:

  • DraftKings has gone public and now has a market cap of around $14 billion.
  • Golden Nugget is spinning off its online operations into a public company through the increasingly popular device of technically being acquired by a special purpose acquisition company. It’s to be valued at around $750 million, or 6.1 times forward revenues.
  • Rush Street Gaming likewise is spinning off its interactive business into a public company, also going the SPAC route, as we’re learning to call these entities. It will be valued at around $1.8 billion at launch, or 5.6 times forward revenue. Rush Street Interactive, which expects to do $226 million in revenue this year, thinks it may eventually do $1.5 billion to $2.3 billion in the U.S. at EBITDA margins of 25 percent to 29 percent. And it’s playing in emerging Latin American markets, too.
  • Penn National stock has soared to all-time highs and has a market cap nearing $8 billion on excitement for the potential of its investment in Barstool Sports to market sports betting.
  • Churchill Downs, too, has hit an all-time high—$7 billion in market value—as it develops its TwinSpires online product and sports betting platform.
  • Caesars stock has equity analysts forecasting a doubling or more in price as they try to calculate the power of its vast player database combined with the sportsbook management of William Hill US, of which CZR owns 20 percent.
  • GAN is around 2.5 times its May IPO.
  • PointsBet stock has soared 1,200 percent this year.

This activity involves some very big players like Rush Street Chairman Neil Bluhm and Golden Nugget CEO Tilman Fertitta. These aren’t starry-eyed kids trading fractional shares on Robinhood. They’re among the soundest businessmen in America.

The roster of big names now includes Barry Diller, whose InterActive Corp. bought 12 percent of MGM Resorts, motivated by optimism over online gaming.

Hold Your Horses

And yet there is, and should be, cause for wariness. Not all of these players will hit grand-slam home runs. Is Penn National, for example, really worth 50 percent more than its pre-Covid high of February because it bought 36 percent of Barstool? Can PointsBet be worth its 1,200 percent increase when it’s still losing money?

Some caution is creeping in among sell-side analysts. Thomas Allen of Morgan Stanley recently cut DraftKings and Penn National to equal weight, citing their big run-ups. Alice Li of Credit Suisse downgraded PointsBet, saying the company might not become EBITDA-positive until 2025, even with NBC pumping $393 million into the Australian-listed company and taking a 4.9 percent stake.

Beyond valuations, there’s also the matter of the field becoming more and more crowded.

Newcomers will have to contend with Flutter, owner of FanDuel, a multibillion-dollar company with years of experience.

William Hill US has nearly 30 percent of the U.S. sports betting market now that Caesars and Eldorado have combined, and it’s bought CT Technology operations. It also has the world’s biggest player database, thanks to its relationship with Caesars.

DraftKings has considerable market share as a starting point.

Penn National, through its own player database and Barstool’s 60 million users, will have potential similar to Caesars in terms of player outreach.

Indeed, the Caesars and PENN-Barstool player databases are huge financial advantages in the online world, where player acquisition is a big and continuous cost.

The competition for share in U.S. sports betting and online gaming will be an interesting war between giants and upstarts, gaming conglomerates and niche fillers. There’s enough potential for many winners. Our bias is to say size matters, and that companies like Caesars, Flutter and Penn National have advantages. But smaller players like Rush Street and Golden Nugget have shown their mettle, and modest gains can be big needle-movers for them.

And, of course, in any gold rush, the sellers of picks and shovels can win whoever claims the gold. In this context, that means software providers such as IGT, Scientific Games, Kambi and GAN.

Candidates to Go Public

The expected online and sports betting booms are also leading to a spate of companies going public through SPACs. Adam Steinberg of AM Steinberg Advisors has speculated on who the next ones might be. Among them are the U.S. operations of London-listed William Hill. Given the dichotomy between fast-growing William Hill US and its slow-growing U.K. parent, an IPO of the American operation might be the way to unlock its value.

Other candidates Steinberg sees are Penn National Online, ROAR Digital, the joint venture of MGM Resorts and GVC, Caesars Interactive, and Sportradar.

Sportradar is a niche company that supplies sports data to a range of clients, from companies to governments to sports teams. That a privately held Swiss company would go public in the U.S. may say something about the potential Sportradar sees in U.S. sports betting.

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