Since the U.S. Supreme Court overturned the federal ban on sports betting in May 2018, 20 states have legalized it. Now, only Utah, Idaho, and Wisconsin do not have some kind of legislation related to sports betting in the works.
Some estimates say Americans bet $150 billion illegally on sports each year. NBA commissioner Adam Silver has said the amount of money being bet on sports in the U.S. could be up to $400 billion per year. The market is large and, when legal and regulated, the betting experience will be divided among retail sportsbooks and with mobile and online bets.
Adam Silver may be the most vocal of major sports league commissioners on the topic, but a recent deal between MGM Resorts International (MGM 0.03%) and the NFL's Denver Broncos shows that sports betting is moving into the mainstream, and investors have several ways to go along for the ride.
From fantasy to real plays
Investors recently began paying more attention to online sports betting after DraftKings (DKNG -0.08%) made its public debut on April 24, 2020 at a price of $17. As its name implies, the company is a leader in fantasy sports gaming. It has a growing user base, with monthly unique payers (MUP) -- a measure of individual paying users -- up 16% in its recently reported first quarter, versus a year ago. And average revenue per MUP has been growing even faster, at an annual rate of 18% since 2017.
DraftKings has been growing its presence in fantasy sports, even during the pandemic, adding fantasy options in Korean baseball, esports, and games like Call of Duty and Madden Stream. But the company is only just starting to move into live sports betting, with recent deals with regional casinos in Michigan and Colorado for a retail sportsbook presence. The company said that legal sports betting, including horse racing, was a $73 billion market, globally, in 2019. And there are other players that are already there.
Playing in the U.S. market
FanDuel, a DraftKings competitor, is part of U.K.-based Flutter Entertainment (PDYP.Y -0.72%) (FLTR -0.72%), which came together in its current form from several acquisitions and a merger. The result is a global sports betting group that has steady cash flow from other divisions outside the U.S. that are able to support growth in FanDuel.
FanDuel has a partnership with U.S. regional casino operator, Boyd Gaming (BYD 0.22%). Boyd operates 29 casinos in 10 states. The relationship ties Boyd's casino customers to FanDuel sportsbook retail operations, helping FanDuel also grow its online base. FanDuel, in Flutter's U.S. division, is just one of four areas where Flutter operates. It also has Paddy Power Betfair (PPB), which operates both online and retail sportsbooks mostly in the U.K. and Ireland, and an Australia division that runs an online sports betting platform.
PPB's retail and online divisions grew sports revenue even during the COVID-19 pandemic, with even higher double-digit growth pre-pandemic year over year. These divisions can funnel cash to the U.S. division to support FanDuel's growth. Flutter said that FanDuel's online sportsbook currently has an approximate 41% market share.
Getting into the game
The MGM deal with the Broncos is just one example of casinos moving into the growing space. It gives a retail sports presence right in a stadium to the casino's BetMGM mobile app, which the company can expand.
Fellow casino operator Penn National Gaming (PENN -2.81%), which has retail sportsbooks in six states, took a 36% interest in digital sports media company Barstool Sports earlier this year, for $163 million. Barstool CEO Erika Nardini says the company will launch a new betting app in September.
More than one winner
It seems clear that the path to capturing share in the burgeoning sports betting market will include a combination of retail and online presence. DraftKings is mostly a pure online play right now, though it is growing beyond its daily fantasy game roots.
With BetMGM, the casino giant has its own digital presence and could be a big player in sports betting if it wants to focus on it. But it seems that Penn National's investment in Barstool, and Flutter Entertainment adding FanDuel to its mix, shows the most dedicated track to combining the retail sportsbook with an online presence.
An investor has to make some choices and assumptions in this sector. Between the two casino operators, MGM has the uncertainty of the pandemic-related impacts to its physical casino operations built into the price, resulting in a discounted share price historically. Penn National also has pandemic-related uncertainty, and its investment in Barstool has yet to play out, so that creates an unknown as a sports betting investment.
As a foreign-based company, Flutter is less well known. However, its assets all play in the global sports betting market, and existing cash flow can help fund growth in the U.S. market. So investors have different ways to play the sector, and can decide based on risk tolerance and whether they also seek traditional casino assets to add to their portfolio.