Penn Entertainment (PENN -1.92%) and DraftKings (DKNG 4.96%) are major players in the lucrative world of sports betting, each carving out their niche in this evolving market. These companies garner a growing part of their revenue through online sportsbooks and gaming apps.
As Penn Entertainment unveiled ESPN Bet in mid-November, the industry braced for a shake-up, presenting both opportunities and challenges for investors and established leaders in the space, such as DraftKings. Let's look at what investors need to know before betting on one of these strong sportsbook contenders.
1. ESPN Bet could well be a game changer in sports betting
The entry of ESPN Bet into the sports betting arena marks a likely turning point in the industry, following its initial rollout to 17 states. This fusion presents a unique opportunity to capitalize on the widespread appeal of the ESPN brand (owned by Walt Disney) and Penn's industry experience.
The strategic collaboration between a major sports network and a betting platform may significantly amplify user engagement and betting volumes, ultimately boosting revenue. Investors should monitor early results from the launch. If ESPN Bet can quickly take market share, it'll likely reshape the competitive landscape for sports betting. Despite those advantages, ESPN Bet will still have to distinguish itself in a market dense with established competitors.
2. DraftKings' resilience amid rising competition
One of those established players is DraftKings, which has also held its own in this competitive industry. The company's third-quarter revenue surged to $790 million, up 57% year over year. DraftKings' strategic expansion into new jurisdictions and diversification of its offerings have resonated well with its customer base. The company now hosts mobile sports betting in 22 states and iGaming in five, and DraftKings is pursuing a move into Puerto Rico in the near future.
Since the launch of ESPN Bet by Penn Entertainment introduces a significant rival, investors should consider how this new player might affect DraftKings' market share and growth trajectory. While DraftKings has a strong foothold, the enhanced competition could pressure its customer acquisition and retention strategies.
3. The influence of market trends and consumer behavior
Market reports indicate the shift toward mobile and app-based platforms is exceptionally strong. This trend aligns perfectly with DraftKings' strengths, given its position in the mobile sports betting sector. With the global online gambling market projected to grow at an 11.7% compound annual growth rate over the next seven years, according to Grand View Research, adapting to these consumer preferences is key for companies like DraftKings and Penn Entertainment.
DraftKings, already a leader with 57% of sports bettors preferring its platform according to Drive Research, must continue to innovate and adapt to retain its top position. The company's proficiency in mobile betting is a significant advantage in an industry where 70% of sportsbook wagers are placed on mobile devices. For Penn Entertainment and its ESPN Bet launch, replicating this success in mobile engagement remains crucial in capturing market share.
However, this industry shift also poses challenges. Both companies must continuously innovate to meet evolving consumer demands, especially as Drive Research notes that convenience and ease of deposits are essential to the allure of online betting. The future growth of DraftKings and Penn Entertainment in the sports betting arena will depend heavily on their ability to align with these market trends and consumer behaviors.
4. The regulatory environment and its implications are a wild card
The regulatory landscape shapes much of the future of the sports betting industry. Sports betting is legal in 37 states and Washington D.C., with other states drafting legislation. This expanding legality opens significant market opportunities for the industry leaders.
However, navigating this regulatory maze is a complex affair -- each state presents its own set of rules and challenges and requires compliance with distinct legal frameworks, impacting operational costs and strategies. DraftKings and Penn Entertainment must adapt to these varying regulatory environments to maximize their growth potential.
Moreover, the legal shifts also present risks; changes in regulations or delays in legalization can impact market access and profitability. Last year, the Maryland Lottery and Gaming Control Commission fined BetMGM for improperly timing the acceptance of bets permitted through its mobile app. The fine to that app, jointly owned by MGM Resorts International and Entain Holdings, is just one example of compliance risk for industry operators.
Investors should consider how well sportsbook companies are positioned to leverage new markets while managing the intricacies of compliance. As the landscape continues to evolve, the ability of companies like DraftKings and Penn Entertainment to effectively navigate these legal waters could significantly influence their long-term growth and market dominance.
Is the smart bet to hold, call, or fold?
My recommendation to hold on DraftKings recognizes its proven track record, evidenced by its significant revenue growth and leadership in mobile sports betting. DraftKings' ability to maintain a dominant position despite rising competition points to its potential for continued success, but the potential shake-up ESPN Bet presents means now may not be the best time to buy.
On the other hand, any recommendation to buy Penn Entertainment hinges on ESPN Bet living up to the market's expectations. There's no doubt the synergy between one of the biggest sports brands in the world and an established betting platform offers promising upside.
