Shares of companies that provide the technology for casino gambling had a strange day on Wednesday, to say the least. Shares of IGT (NYSE:IGT) fell as much as 12% and the stock of Everi Holdings (NYSE:EVRI) plunged as much as 14.3%. The stocks closed down 11% and 12.3%, respectively, for the day.
The one news item came when Canaccord analyst Michael Graham initiating coverage on DraftKings with a buy rating and a $25 price target. His thesis is that online gambling is just getting started and could grow from an estimated $430 million in 2018 to $26 billion when the market matures, which is an unknown timeline.
That has kicked off a trading trend away from companies that are providing physical products for casinos to more digital offerings like online gambling, which is all that DraftKings does. So despite the fact that it's losing money and can't legally be used in a vast majority of the U.S., it's the default winner for today.
What we do know is that casino companies like MGM Resorts International and Las Vegas Sands have reported earnings from the first quarter, and there's little doubt that 2020 will be a terrible year for the industry. That could put a big damper on new hardware investment over the next couple of years, which would hurt companies like IGT and Everi. Whether or not those gambling dollars move online is currently unknown.
It may ultimately be true that gambling online grows at a much faster rate than gambling in casinos. And the budget deficits building at a state level may give politicians a reason to legalize online betting. But there's reason to be cautious as well.
Right now in the U.S., most online sports betting has to be tied to a physical location, and often a casino license has to be tied to that location. So a company like DraftKings may be the software behind online gambling, but a company like MGM or Las Vegas Sands may hold the gambling license. That could limit the upside for a service provider. And let's not forget that DraftKings isn't yet profitable or legal in most states.
I'm a big believer that online gambling will be a big growth business long term, but I want to see DraftKings make money and get licenses in more states before believing in its future. I think there will be a lot more competition from suppliers like IGT, which has an online betting platform and a market position to defend. But today, investors are excited about the online-betting pure play DraftKings.