Online sports gambling is a home run, but not yet with investors
Betting on sports online has proved to be a big hit with Americans as more states legalize it, with gamblers smashing records on the Super Bowl and March Madness. But one group has so far proved more skeptical: investors.
The stock prices of leading sports betting companies have slumped despite the betting boom, raising questions about how quickly the public's enthusiasm for online betting will translate into fatter profits for the businesses behind all that gambling action.
Over the last 12 months, DraftKings shares have tumbled 73%, to $18.20 on Friday — below the $20 the stock traded at when the company went public in April 2020. Shares of FanDuel-parent Flutter Entertainment are down 47% over that time period, while Caesars Entertainment's stock price is off 5%.
DraftKings reported $1.3 billion in revenue and $615 million in profit for 2021, while the Flutter division that includes FanDuel reported $1.8 billion in revenue and nearly $1 billion in profit.
In the short term, the main issue weighing on sports betting platforms are the vast sums they've spent on advertising and marketing to acquire customers — a common predicament for younger companies seeking to drive growth by gobbling up market share.
Players like DraftKings and FanDuel have spent so aggressively that it has drained their cash, said Daniel Adam, senior analyst at Loop Capital Markets. In 2021, DraftKings and Flutter spent $981 million and $875 million, respectively, on marketing, promotions and advertising, regulatory filings show.
"That's really the main driver in the underperformance in the share price," Adam told CBS MoneyWatch.
Adam remains bullish on their longer term prospects, although he said it could take two or three years for the additional earnings to flow. At some point in the future, gambling operators will start to spend less on advertising and more money from dedicated customers will flow in and strengthen profits. He predicts DraftKings stock price will grow to $35 a share in the next 12 months while Caesars may grow to $109 a share.
Certainly, the explosion of online sports gambling stands to drive industry growth, with Arkansas, Louisiana and New York all legalizing it this year. New Yorkers alone placed $1.6 billion worth of online sports bets during the opening month of wagering, while Arkansas and Louisiana also had lucrative rollouts. Thirty states now offer legalized online sports betting.
Betting companies also are heeding Wall Street's call to rein in their costs and lay the groundwork for profitability. Caesars Entertainment CEO Tom Reeg said in an earnings call last week that the company is pulling back on advertising. For television and website viewers, that will mean seeing fewer spots for the casino company's and sportsbook's "We are all Caesars" campaign, featuring actor Jerry Brooks, known as J.B. Smoove.
"You are going to see us dramatically curtail our traditional media spend effective immediately," Reeg said during the call. "We have accomplished what we set out to do."
DraftKings also plans to dial back its ad spend in New York and other markets, CEO Jason Robins said during an earnings call last month.
"One of the reasons you see such a faster pace to 100,000 users in recent states like Arizona and New York is because of the competitive advertising, ironically," Robins said. "I think a lot of that is actually accelerating our ability to launch faster and to grow faster, and it might even lead to a faster path to profitability in states."
