Please ensure Javascript is enabled for purposes of website accessibility

What Is the Future of Online Gambling?

By Travis Hoium - Jun 30, 2020 at 11:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Online gambling stocks have been on fire, but there's reason to be skeptical about the industry long term.

There has been a lot of buzz over the last few months that online gambling is going to be the next big growth area for the gambling industry. Shares of GAN Limited (GAN 3.83%) and DraftKings (DKNG 0.63%) have been on fire since reaching public markets, and Flutter Entertainment (FLTR -0.19%), which owns The Stars Group, has had a nice run as well. 

Rising stock prices have been driven by stronger-than-expected online play during the pandemic and speculation that budget shortfalls in states across the country will open up online gambling. But the three aforementioned companies may not be the biggest winners in the industry, depending on how regulations play out. 

GAN Chart

GAN data by YCharts

How online gambling works

There are a number of ways gambling has been legalized in the U.S., and that makes the industry a little confusing. Some states allow online sportsbooks, others also allow casinos, and some even require a physical presence to operate there. If the rules were wide open everywhere, DraftKings and Flutter Entertainment would be the clear stocks to own because they're pure plays. As states open up gambling, beyond the 16 that allow some sort of betting today, they will see revenue grow.

But the casinos with a physical presence have an advantage in some states, and that gives them the opportunity to keep start-ups at bay for the time being. MGM Resorts (MGM -0.17%) is a great example of this, partnering with GVC Holdings to build sportsbooks and casinos in nearly every state where it's possibly legal. 

GAN Limited is one of the companies offering services to casinos like MGM Resorts, giving them the software to help open a casino extremely quickly. The theory is that bringing a software company together with a gambling brand can be a way to grow the business for everyone. 

IGT (IGT -2.32%) and Scientific Games (LNW -0.66%) have also built services casinos can use to build online gambling platforms. 

What you'll notice is that traditional casino companies are primarily leaning on partners to bring online gambling to the market. In that sense, it's the software companies that have the most opportunity and are highly valued by the market. But these aren't your typical technology stocks because this is a highly regulated and very competitive market without a clear winner-take-all outcome expected in the future. 

Two people betting on sports on a mobile phone.

Image source: Getty Images.

Competition is fierce

The assumption is that online casinos and sportsbooks will print money for investors. But that may not be the case. States that open up to gambling often open the doors to many more online companies than they would physical casinos, which are often very limited. 

For example, there are 22 online casinos operating in New Jersey, Pennsylvania has 10 online casinos, and Indiana has seven sports-betting apps. This just shows that when online gambling and/or sports betting are legalized, the competition comes in quickly. 

Economics 101 indicates that the more competition there is the more companies will have to compete to attract customers. They do this in online gambling by offering financial bonuses, or bonuses from free games, and even advertising in traditional media to attract customers. If the number of competitors continues to be high, revenues and margins may both be lower than investors expect because of this competition. 

How to play online gambling

I think there's more of an advantage than investors think in owning brick-and-mortar casinos and then moving online. MGM Resorts has been the most aggressive in entering online gambling through its BetMGM app and continues to add markets. That's my top pick to win long term. 

DraftKings has a brand advantage compared to other online-only companies. And since it can offer its own products, rather than being a service provider for other brands, it's in control of its own destiny. But a market cap of nearly $12 billion is steep for a company that can operate in very few markets today. 

What investors should worry about is that only 16 states have any sort of legal online betting, and the market may not open up as quickly as investors hope. I worry that betting on online-only gambling companies with rich valuations is a losing bet. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of Flutter Entertainment. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

MGM Resorts International Stock Quote
MGM Resorts International
$35.54 (-0.17%) $0.06
Flutter Entertainment PLC Stock Quote
Flutter Entertainment PLC
$10,685.00 (-0.19%) $-20.00
DraftKings Inc. Stock Quote
DraftKings Inc.
$20.80 (0.63%) $0.13
GAN Limited Stock Quote
GAN Limited
$4.34 (3.83%) $0.16
International Game Technology Stock Quote
International Game Technology
$21.92 (-2.32%) $0.52
Light & Wonder, Inc. Stock Quote
Light & Wonder, Inc.
$57.58 (-0.66%) $0.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.