In this episode of Industry Focus: Wildcard, Nick Sciple chats with Motley Fool contributor Luis Sanchez about the current state of the online gambling marketplace in the U.S. Online gambling has been around for decades globally. Learn about some of the local and international players, their operations, and how they are developing and using their expertise to gain an upper hand in this space. The guys also share some online gambling stocks to put on your watch list and much more.

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This video was recorded on June 24, 2020.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple, today I'm joined by Motley Fool contributor Luis Sanchez who's here to help me break down the current state of the online gaming industry. Luis, welcome back on the podcast.

Luis Sanchez: Happy to be back.

Sciple: Great to have you on, Luis. I know this is an area in the market that you've really been focused on, particularly over the past month. I know a lot of people, particularly in the U.S., have gotten more interested in online gambling since the Supreme Court lifted federal restrictions on online gambling back in 2018. But it's important to note, this is a global industry that's been around for decades. When you look at the online gaming industry today, how big is it?

Sanchez: Yeah. So globally, I've seen stats that put it at about $450 billion.

Sciple: Yeah. So a $450 billion market. And outside of the U.S., where are the big markets we should be paying attention to? What's the nature of this industry?

Sanchez: Yeah, the most developed market is Europe. I believe the U.K. is probably the best regulated online. Well, gambling is legal across Italy, Spain, the U.K. There's actually also some weird gray markets in Europe, like I think Germany is technically not legal but the companies still operate there and they pay their taxes, which is interesting. Australia is actually another really big gambling market. And then, you know, really, it's a very global industry. In Asia, there's a few places that are legal, there's a few places that are gray. In Latin America, you kind of see the same thing. And right now, the biggest catalyst is the U.S. and what's going to happen here in the next 5 to 10 years.

Sciple: Right. A lot of these other industries or these other markets have been around for decades, and are really, probably, at a mature state. [laughs] Honestly, at a state where regulators are starting to crack down on the industry somewhat, but when we look at the U.S., really massive growth since legalization took place. New Jersey and Pennsylvania in particular, very mature markets. What are we seeing there when it comes to growth?

Sanchez: Just to make one more comment on the global industry, the really big theme there is really this transition from offline to online, and that's really been the biggest driver of, I guess, the most interesting way to invest. So this is like a theme that we've seen play out in a lot of other industries, whether it's retail and the transition to e-commerce or, you know, name your industry that's becoming digitized. So this trend, I think right now online gambling has about an 11% share globally. And I mean, in the context of a global pandemic, it's definitely increasing, but it was already increasing about 1% or 2% per year in regards to penetration. So I think that's just a really interesting global theme.

As far as the U.S., as you mentioned, huge legal change in 2018 when the Supreme Court overruled this law called PASPA, [Professional and Amateur Sports Protection Act] which basically gave a path for states to legalize sports gambling. And since that rule has been overturned, we've seen, I think, about six states go full legalization of sports, meaning some form of in-person or some form of online. New Jersey and Pennsylvania are really leading the way. And if you just look at how fast the market's grown in New Jersey and Pennsylvania, you know, you could really get a sense for why everyone is so excited for what's going to happen when more states join the party.

Sciple: Right. I mean, you see these numbers coming out of New Jersey, [laughs] and by some measures, the New Jersey sports betting market had surpassed Nevada within this very short period of time. And you know, Nevada, this is a sports betting market that's been around for decades. So to see that growth that quickly just reflects the demand that has been underlying in that market. And you mentioned some of these black and gray markets outside of the U.S. I think to a certain extent, some of this is black market, people that were otherwise gambling that is now becoming a more transparent part of the market. So just kind of bring that opportunity to the forefront. As we look outside of these early-adopter states, Luis, where do we see continued opportunities for growth, where are the hurdles for this market to continue growing?

Sanchez: Yeah. So I think at this point there are 12 states that have legalized some form of sports gambling, and there's some nuances and differences between the states. And of those 12, I think only, like, 5 or 6 live today. So some of those states are still coming online. There's a lot of speculation on, well, what's the path forward? What can we really expect as this trend kind of develops?

And the best framework I've seen for trying to figure this out is really to look at what happened with the daily fantasy sports industry, which I think has been going on for about 10 years in the U.S. and required some legislative action to make cash play legal. And what we saw with daily fantasy sports, which is really primarily DraftKings (DKNG 0.71%) and FanDuel, how they got started, is 42 states in the U.S. legalized daily fantasy sports. So then logically we can probably conclude that 42 states is probably the higher end of what we could expect in terms of which states are likely to then go a step further and legalize sports gambling.

And then there's also, you know, in addition to sports gambling, there's this whole other online form of gambling which people refer to as online casino or iGaming.

Sciple: This is like roulette, blackjack, craps, those sorts of things, the types of games that you would play in a casino that is available in an online format through your phone like a mobile game.

Sanchez: Yeah, exactly. So there's some cultural nuances around how widely adopted iGaming will be legalized, because I think people are a lot more empathetic to legalizing sports gambling, it tends to be a less addictive activity because, you know, you have to wait for a sports event, so you can't just sit around and, you know, run a bunch of sports, that's typically -- whereas iGaming, online casino is something where it can really bring out the worst in a gambling addict. So that's definitely an area of online gambling where states are a lot more careful around legalization.

So there are some states that have already legalized both online sports and online casinos, and New Jersey and Pennsylvania are two examples of that. And going back to that thought of how many states at maturity could legalize iGaming? You know, I would expect it to be less than the number of states that would legalize sports gambling for those reasons. So if we think that in the next 10 years, 30 to 40 states would probably legalize online sports gambling, you know, it's probably a good assumption to make that maybe 20 to 30 states could probably legalize iGaming.

I guess the push and pull of this though is that, you know, what's happened with the economy, a lot of states are actually feeling more pressure to legalize sports gambling and iGaming to get the tax revenues, whereas a year ago, people were talking about one set of assumptions over how large this market could be. I think one of the big catalysts for growth here is just kind of a rethinking of, well, you know, maybe on the margin, we could actually get more states legalize gambling and we could actually see that happen quicker.

And just kind of given the nature of iGaming and iCasino, that's actually a more profitable source of tax revenue for states. So assumptions across the board, they seem to be getting more bullish on the prospect for legalization in these different forms of gambling.

Sciple: Right. I guess states need the tax revenue as the economy slows down, and this offers ready access to that. And I guess there were already some arguments out there, you know, even before coronavirus, that states shouldn't leave this tax revenue on the table and allow their neighbors access to that. And so that could be a driver for this market.

And, kind of, last thing on the regulatory aspect and how we should think about that before we get into some of these companies operating in this space. When it comes to legalization, obviously, every state has the opportunity to take an approach that is unique to their own framework to regulate their markets. So for these operators in the space, how should we think about the complications of navigating potentially dozens of different, unique regulatory environments?

Sanchez: Yeah. I think the right way to think about this market is it's not really, you can't really view the U.S. as one giant online gambling market. You really have to look at it as 50 different online gambling markets, because each state is very different in a number of ways. One important thing to consider is a lot of these states already have regional casinos, and they're worried about cannibalizing those existing casinos. Other states have a presence of a lot of Native American casinos and, you know, there's pushback from the tribes in terms of what they're willing to allow to happen. And then the way that manifests, it's just a lot of different ways, a lot of different approaches that states have taken.

So one example is the New Jersey-Pennsylvania model, which basically says, if you're geographically located in the state of New Jersey, you know, anything goes. You can go to a casino, you can go to Atlantic City and place a wager in person or you could sign up for the FanDuel or the DraftKings app and place a wager there. There's other states where they've limited sports gambling to just in person. So New York and Mississippi are two examples of states like that. And as you would probably expect, just because of that obvious limitation, it's been a lot slower to take off in a state like New York or Mississippi.

And a lot of people actually do expect New York to eventually go through with online gambling legalization, but maybe this is like a baby step, you know, they want to experiment with having sports betting done in person first, and then if it goes well and there's no issues, then maybe in, like, a couple of years they'll legislate it online.

And then there's in-between rules, where, for example, in Illinois, they had a rule where you could gamble online and you could open an account, but you had to register the account in person. [laughs] That rule was actually suspended, I think, largely due to the coronavirus pandemic, and they just realized that that hurdle was creating unnecessary burden on players and casinos.

And then there's other interesting nuances around how regulation could play out. I think the biggest one is, how many licenses the state will allow. So for example, if a state only grants two or three online licenses, well, that's going to limit the market in some ways, whereas in other states, they might kind of just be a little bit more aggressive and just allow maybe like a couple dozen. And while allowing fewer licenses will limit maybe the number of operators, it'll actually help the regulators more carefully monitor how the market is developing and also more carefully monitor that idea of socially responsible gambling, which is a pretty big issue.

Sciple: Yeah. And I think that's something we can certainly talk about later. You raised the idea of one of the constraints to uptake in some of these jurisdictions has been this need to either go in-person to register so you can bet online or perhaps only bet in a physical casino. We mentioned earlier this idea that maybe because of coronavirus, states are more likely to legalize to gain access to revenue. If you carry that logic even further, you could say, if legalization were to take place given the environment we're in today, probably a little bit more likely to permit online gambling with less of those in-person restrictions. So again, adds a little bit of a tailwind to this market, is that enough to really change the thesis for some of these companies? No, but something to think about when it comes to the potential opportunity for the business.

So when it comes to a potential opportunity to invest in this market as an investor, kind of, high level, where are the buckets that you could go put your money into if you wanted to go invest in this market today, where are the opportunities to do so?

Sanchez: Yeah. So the first really interesting thing I'll point out here is that the most experienced operators are all European companies, just because that's the most developed market. So you go to a market like the U.K., and there's maybe like a dozen publicly traded online or hybrid online in-person gambling companies. And a lot of those companies are trying to set up shop in the U.S. now, now that there's this great growth opportunity, as they perceive it. And there's really multiple pieces you need to establish an online gambling operation. The first thing that you need in the U.S. is you need market access, you need a license, and the way that's handled in most states is administered through the land-based casinos that already have gambling licenses. So what you're seeing in a lot of cases is an online player from Europe partnering with a land-based casino here to form either a new entity or, in some cases, just to vertically integrate and merge.

Another really important piece and probably the most important piece other than access is you need a brand, because just because you set up a website that allows people to gamble doesn't necessarily mean people will know to go to that website and gamble. And these European companies, like William Hill or GVC or Flutter Entertainment, which are very large European operators, don't have American brands or they didn't have American brands, and they're now trying to figure that out. So I believe GVC, for example, has partnered with MGM. Flutter has acquired FanDuel and, you know, there's been a whole bunch of other interesting partnerships.

And then, I think the last important piece that you need and you probably can't disregard it, is you need to be able to have that operational expertise to know how to power the backend. So that's like the IT aspect, knowing how to manage payments. And just because this is like geofenced for regulatory reasons, it's actually quite complicated. And then each state has its own unique rules around what kind of bets can be placed, how large the bets can be placed, how do you monitor player accounts. So that IT back end is actually quite complicated. And I think the European players are -- this is going back to the European players, this is why they're really well equipped to handle this, because in Europe, they are dealing with multiple jurisdictions, whether a company like Flutter will have its U.K. operations, it will have its Irish operations, it will have its Spanish and Italian operations. And it's using the same back end, but it knows how to, kind of, plug in and modify the tech back end to deal with these different markets.

So I think the real important takeaway here, though, is that online gambling is a very different kind of business than a land-based casino. And I don't think that you can assume that a company that has traditionally operated as a land-based casino will automatically be a good operator as an online casino, just because there's a lot of nuances there. In fact, I was speaking to someone in the industry who said, if he was starting a new online casino and he had a choice of who he could hire, someone who used to run a land-based casino or someone who used to run an e-commerce store, he would go with the person who could run the e-commerce store, because he thinks that running an e-commerce business, like a Shopify store, is actually a lot more similar to running an online casino, which I think is a really fascinating insight.

Sciple: Yeah. There are so many ways you can go off of that observation. This idea that, I guess, a casino is more of a hospitality brand, a hotel, versus, you know for these online companies, it's all about driving demand, whether it's via search or advertising or branding. I think, yeah, that certainly does seem like a different skill set. So it sounds like, from your perspective, Luis, the areas of the market that are most interesting to pay attention to today are these tech-focused operators or folks providing the software on the backend that's really going to power the online segment of growth and sports betting and other online betting opportunities.

Sanchez: Yeah. And it's funny, because it's not like the tech companies could just go on their own, because they still do need a partner in some form [laughs] with the land-based casinos, just for the market access. So it really creates a very interesting web of partnerships, joint ventures, and now we're starting to see mergers and acquisitions. So it's a very dynamic market to analyze.

Sciple: Yeah. You mentioned mergers and acquisitions, and there's, you know, [laughs] the two companies that we've kind of danced around here are DraftKings and Flutter Entertainment, which is the parent of FanDuel. These are the big names in the industry. DraftKings, the last three months, up 231%. Flutter, still doing quite well, up 95%. Both of these companies have had a number of mergers in recent months to really bring their total offering together under one umbrella. And I think, given the interest in these companies, it's worth taking some time to dive into them more significantly.

Let's take them in turn. So when you look at Flutter Entertainment, it's parent company of FanDuel, what can you tell us about that business and their assets?

Sanchez: Yeah. So I recently wrote a piece for on Flutter, and just kind of describing all the various assets that it owns, and it's actually really impressive. So some of these brands, even if you're not a gambler, you've probably heard of them. Like, they own PokerStars, the No. 1 poker company in the world. They have the No. 1 market share in the U.K. in terms of their online gambling through a couple of different assets: one called Sky Bet, another one called Paddy Power. They also own a really large online betting exchange called Betfair. They have the No. 1 gambling business in Australia. And now, in the U.S., they have FanDuel. They also have this, kind of, upstart FanDuel competitor called FOX Bet, which has a really interesting media deal with Fox Sports, it was just launched in 2018 in the fall, but I actually think FOX Bet, the strategy could actually really meaningfully have taken market share once we start to get sports back.

So Flutter doesn't get a lot of coverage in the U.S. because it trades in London. It has an ADR that American investors could access. But if you look at it, it's really kind of the behemoth. And in the early states, like New Jersey and Pennsylvania, they actually have more market share than DraftKings. And so, by all measures, Flutter vis-a-vis FanDuel is currently the market leader in the U.S. as well as internationally.

Sciple: Yeah, their relationship with Fox I find particularly interesting. When they acquired the Stars Group that came with the PokerStars asset as well, that's how they got access to FOX Bet, that came with it, Fox's stake in the Stars Group. And along with that stake, Fox has an option to raise its stake in FanDuel to up to 18.5% by 2021. Obviously, having a media partner with that significant of an ownership in your company certainly gives them an incentive to promote your brand. And Fox has those NFL rights, has those really important sports rights. What opportunities do they give to them given how marketing is going to be really important in the early days as this industry grows?

Sanchez: Yeah. So it could be a very effective strategy. And you know, the playbook for FOX Bet was really established in the U.K. through this entity called Sky Bet, which, Sky is a U.K.-based broadcaster and they created basically this online sports gambling/media brand, which really leveraged that kind of broadcast platform and tied together a betting platform with the way that the sports content was being shown.

And it quickly actually rose to be the No. 1 sports betting platform in the U.K. And this is really interesting, because the U.K. is a market where, literally, these betting brands have been around for more than 100 years. So the fact that in the last handful of years, a new company with just a really savvy media strategy could come out and become the No. 1 brand really says a lot to how powerful the strategy could be, which is why I think it could actually work in the U.S.

You know, that being said, FanDuel and DraftKings have a really big head start. And the biggest reason they have that head start is because they've been already offering daily fantasy sports for, I think, the last decade, basically. So they have already, kind of, established brand equity, but probably more importantly, they have these massive databases of preexisting customers in each state and nationally. So they already know the names, the email addresses, and they have credit cards for people who already inclined to bet on sports, which is just a huge advantage.

Sciple: Right. I mean, the Venn diagram of people who are into fantasy sports and the people that like to bet on sports has a whole heck of a lot of overlap, and if you've been able to develop these customers for a number of years and build relationships, that's certainly a valuable asset. You know, we're going to get into DraftKings here in one second, just last thing on FanDuel. We mentioned the international part of the business. We've talked offline about some regulation coming in place and how that may affect these international players. Is there any concern with you when it comes to those assets of Flutter and whether they may be impaired by some of this regulatory action overseas?

Sanchez: Yeah. So Flutter's largest market is the U.K., and it also has a big operation in Australia and Ireland. Basically, all three of these markets are facing, kind of, tougher regulation than they ever have in the past. So the kinds of things that we're seeing include the sales tax on gambling has been going up. I think it went up about 5% in the U.K. and Ireland in the last year. It was increased by 11% in Australia in the last year. And then there's all sorts of other things that regulators can do to make it make it tougher to operate these businesses or, I guess, make it stricter. So I think they've placed limits on -- they've barred them from accepting credit card as a form of payment, is another example. They've placed limits on the kind of -- like the size of the bets you could make for in-person gambling.

So in the U.K., they have these betting parlors which are essentially like retail locations where you can come in, and they have slot machines and that kind of thing. And they've basically been cracking down on that a little bit. So they've reduced the staking limit from 100 British pounds to 2 British pounds, so a 98% reduction in the staking limit. And there's a big risk that, although it's not currently being done with online casinos, but there's a big risk that the way that the regulators have cracked down on the retail market, they'll do the same with the online market.

Sciple: And that's something that affects Flutter to a greater extent than DraftKings, which is more of a direct play on the U.S. market.

Sanchez: Absolutely. Exactly. So Flutter, you know, it's an interesting business, it has a global operation, but it's not a U.S. pure play. And, you know, investors really like the U.S. pure play right now because there's all this growth expected and there's none of this regulatory baggage.

Sciple: Yeah. So let's move on to DraftKings, you know, it's similar to Flutter in the sense that they have this exposure to the daily fantasy sports market, a built-in customer base that they've been developing over a number of years. However, where DraftKings has a little bit of a different approach has been this merger with SBTech to really get directly involved in this back-end software powering their gaming offering; like you talked about earlier, Luis. What does that offer DraftKings that maybe sets them apart from others in the industry?

Sanchez: Yeah. So DraftKings actually just went public through a SPAC [special purpose acquisition company] offering in April. And as part of that SPAC offering, they simultaneously announced a merger with SBTech, which is basically this B2B software company that powers different online gambling scenarios. One of SBTech's biggest customers is actually state lotteries, so I think they do like the Oregon Lottery, but they also have a lot of know-how in terms of how to handle managing customer accounts, and how to handle payments. They have pretty good sophistication in terms of how to develop content and how to drive innovation for new forms of play for an online gambling scenario. So this is really a vertically integrated approach, whereas Flutter, it definitely has the capability to vertically integrate, but it has taken a much more piecemeal approach where Flutter actually uses a lot of third-party content, some of which we may talk about in a second.

But the DraftKings approach is interesting. I think, by owning the tech stack, there's obviously an opportunity to increase their margins over time, but they could also just control the experience a lot more. So one thing that could be an interesting opportunity is the ability to allow in-game betting. So basically some people will make a bet on the sports event on the day before or the day of, but actually, if you look at the way people bet in Europe, I think actually two-thirds or definitely a majority of sports wagers happen and are placed after the match has already started. And that's a little bit more of a technological challenge if you think about it, because obviously, you know, the odds of the outcomes change during the match, but it's a very engaging way to play, and it's a very engaging way to just watch a game as a fan.

So being able to own the innovation process is actually a huge potential differentiator for DraftKings. For example, if we get into a scenario where DraftKings has the ability to offer in-game wagers where FanDuel doesn't, I mean, that suddenly gives sports gamblers a really big incentive to go and use the DraftKings app over the FanDuel app.

Sciple: Yeah, absolutely. So maybe that ability to be on the cutting edge of innovation, whereas FanDuel and others may be using an off-the-box product.

Sanchez: Yeah. It's also really important when it comes to iCasino, the online slots and online roulette and things like that. What you see a lot of is these different online gaming companies using the same B2B service providers for content. And as a player, you'll pick up on the fact that, well, if DraftKings is using the same iCasino as maybe something like Penn National would offer, it's not a very differentiated experience, because they're essentially using the same content provider. So the ability for DraftKings to maybe have a game that's unique to DraftKings or proprietary form of play on the iCasino side is actually also a differentiator.

Sciple: All right. So outside the SBTech part of the business, any other key points we should note as far as differentiators between what Flutter offers and maybe differences in potential opportunities for the company?

Sanchez: Yeah. I think the really big thing with Flutter, well, there are two things that I would point out with Flutter, one, we kind of mentioned is, they have a multibrand approach, so they're actually looking to segment their audience. They think that some of their audience will be more interested in the FanDuel app, maybe they have some brand equity there, but they think that there's a different segment of the audience that'll be more inclined to use the FOX Bet app.

So this is actually a strategy that they've used in other markets to success, where by having a multibrand approach they've been able to pick up different segments of the player market, whereas DraftKings is really going with its singular brand approach, which is interesting. The other thing that's interesting is, like, these other capabilities. So the capability to cross-sell players into the iCasino.

So Flutter has a lot more capabilities in terms of its iCasino, just given its merger with the Stars Group, which gave it PokerStars. You know, PokerStars has a lot of really interesting casino functionality and Flutter has a lot of really interesting experience operating those kinds of businesses in Europe, whereas DraftKings is still trying to figure that out. That's not really where DraftKings has been focused, so perhaps the SBTech acquisition gives them a little bit more edge there.

And, you know, one thing that's really important to point out in regards to the balance between managing an online sportsbook and managing an online casino is that the online casino is actually a very profitable business for all these players. Because if you think about it, online sports betting is a game of skill, the odds are fixed, obviously, the bookie is going to fix the odds in their favor, but there is such a thing as professional sports gamblers. You know, there is a way to, if you're really good, there is a way to, kind of, have an edge yourself, whereas in iCasino market, you know, the odds are mathematically fixed on, like, an online slot machine or a game like roulette, where the statistics are very obviously in the casino's favor. So that tends to be a more profitable activity.

However, no one goes to an online casino, or most people don't go to DraftKings for its online casino. So having, offering the sportsbook is a really good way to bring the customer in. It's a really good customer acquisition tool. And then, to the extent that you could bring someone into your app because they came for sports, but then cross-sell them into the casino, well, you've just significantly increased the value of that customer.

So in my opinion, I guess going back to the original question, I think Flutter has a little bit more of a track record with running that model and DraftKings certainly has that capability, but it's just coming up to speed on how to run that model.

Sciple: Okay, Luis, I think we have time to talk about maybe one more company in this space before we close out our show. And I want to talk about Gan (GAN -3.82%). We mentioned DraftKings' merger with SBTech to really build out its back-end software offerings. Gan, ticker GAN, is a company that came public in the U.S. at the beginning of May, and they really provide the back end for FanDuel's, both, sportsbook and iGaming offering in the U.S. as well as offer that software to a number of other operators in the industry. So when we look at Gan today, what do you see as the opportunity for that company?

Sanchez: Yeah. So Gan is one of these B2B software providers. And they manage everything from managing the player accounts to the payments, to the compliance. And they also manage a marketplace of, like, games. So they'll be able to go to a casino, let's just say FanDuel, for example, which is one of their customers, as you mentioned. And they'll say, OK, we'll manage the whole process, the customer loyalty, and here's a menu of all the best games from all the best content providers, and it's really plug and play. It's one single integration that a casino will have to make instead of having to put together a patchwork of different software solutions from various service providers or going through the challenge of building out your own stack, which obviously requires a lot of effort and costs.

So the analogy that I've been trying to come up with is, I kind of view Gan as like the Shopify model of this industry where, you know, a lot of people are shopping on Shopify, but they don't necessarily know that they're using Shopify. Kind of the same thing with Gan: A lot of people are using Gan, but they don't know they're using Gan because it's white labeled. And Gan also has a similar revenue model, where they're taking roughly, like, a 10% cut of the revenue as compensation. So obviously, this is a potentially very attractive business model if they can continue to scale up. And they're actually in a really unique position, because they've been operating in the U.S. now for about 10 years. So they have a first-mover advantage versus all the other B2B software providers in Europe, which are really just now starting to figure out the U.S. market. Which is one of the reasons why Gan has been able to grow so quickly. So I think it's a really interesting company.

Sciple: Yeah. So one of the questions I have around Gan is just the customer concentration issue. When you look at their revenue, I believe the number is somewhere around 50% of their revenue comes from their relationship with FanDuel and Flutter Entertainment. When you look at that, do you see an opportunity for the company to diversify its revenue? And on the other side, how much risk is there that they might lose that FanDuel business?

Sanchez: Yeah, it's a really important point, kind of a blessing and a curse that they have FanDuel as a customer. Very interestingly, they've been working with Betfair and Paddy Power for about a decade, which are two separate companies that Flutter now owns both of them. So they actually have a really long existing relationship with the Flutter, I guess, umbrella of companies. And today, they're managing both FanDuel's sportsbook tech as well as their iCasino tech. And if you read their financial statement, it's highly likely that they're going to lose some of that business in the next year or so. But there is a huge opportunity now for Gan to basically license its track record with Flutter and just use that as a case study for what it could do for other casinos and other online gaming companies.

They actually reported earnings a couple weeks ago, and on the earnings call, they announced a brand-new tier one, what they called a tier-one customer, which would be like a multistate huge customer, that that customer alone could potentially double their gaming revenue over the next couple of years. Which it just kind of illustrates how easy it is for, when you're growing off of a really small base, you know, we're still only in Pennsylvania and New Jersey for the most part. When you're growing off of a really small base and you're known as one of the one or two really competent operators, it actually could be really easy for them to diversify their revenue base if they can successfully land big casinos, like they seem to be capable of doing.

Obviously, if they lose Flutter as a customer, that would be a huge risk and a huge hit, but you know, I think there is a big opportunity. And more importantly for Gan, I think the opportunity for them is really not to sell to, like, the DraftKings and the Flutters, who have the skill to build out their own tech stack, but it's probably a better proposition to sell to, like, the smaller regional casinos that really will never have the scale to build out their own full tech stack.

And the last thing I'll just point out about Gan, which I think is really great, is that it's already profitable at a small size. [laughs]

Sciple: Right. So yeah. So when you have this software company that's already profitable, that potentially has a really long runway for growth ahead of it, you can see where operating leverage can kick in quickly and that company can really produce some gains. And I think an important thing to think about, we talked about earlier how we expect to see a wave of states legalizing, opening up their markets, that creates an environment where speed to market is really important, because you want to capture customers while they're available and up for grabs. And when speed to market is prioritized, that's where a customer like Gan could really offer some value to these folks.

Sanchez: Absolutely.

Sciple: Okay, Luis. So kind of wrapping everything up. As we look at this online gaming industry moving forward over the next, you know, year or five years, what are you going to be paying attention to to evaluate whether the growth that we think is possible in this industry will take place and to just decide whether this is the space you're excited to invest in?

Sanchez: Yeah. I think the most important thing to watch is the total addressable market and how that develops, because that's really what's driving the valuations of these companies. So looking at how many states, which states have traction with legalization, and then to look at, in the states that do have legalized gambling, how much that's growing and how large the market could be in those states and just trying to clue that into how large the total market could be.

Sciple: Yeah. So just really watching the development of the market and seeing to what extent we can really see legalization take place. Of these companies we talked about today, which one would you be most excited to invest in today and why?

Sanchez: Yeah. I'm excited about a lot of them. I think they all offer very unique prospects. I actually own a couple of them. I think I'm most excited about Flutter, just because it seems to have everything that it needs to dominate the market here and it also has an interesting growth opportunity internationally. I also really like Gan. I own some of that as well, for the reasons I mentioned. But you know, I don't see why, if you really believe in this market, I think DraftKings is actually also potentially interesting depending on how you view the valuation, which is a little bit richer than Flutter. But as a U.S. pure play, it kind of has its own interesting aspects.

You know, the last thing I would say that I'd be really interested in watching is just to see what ESPN does, because there's a lot of potential value there for Disney if ESPN suddenly decides it wants to be a player in this market. And I could see them -- you know, they own a ton of sports rights -- I could see them very quickly taking a lot of market share too.

Sciple: Yeah, we'll have to see lots of things. A very fast-moving industry here and things changing very quickly, and we'll keep on following it as it develops. And hopefully, can have you on again soon to keep us updated.

Sanchez: Yeah, absolutely.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Kyle Carruthers for his work behind the glass. For Luis Sanchez, I'm Nick Sciple. Thanks for listening, and Fool on!