The market in the U.S. for both retail and online sports betting is just setting up as more states move toward legalization. Both domestic and overseas companies are getting in the game, and now is a good time for investors to narrow down the potential winners.
The movement to legalize sports betting could gain more ground with referendums on November ballots in three states -- Maryland, Louisiana, and South Dakota. With their other business segments also set to recover, MGM Resorts International (NYSE:MGM), Caesars Entertainment (NASDAQ:CZR), and Flutter Entertainment (OTC:PDYP.Y) (LSE:FLTR) are names that investors should bet on in October.
Several moving parts
Caesars is far from the same company it was last year, and that's not just because of COVID-19 affecting the casino industry. Caesars was bought by Eldorado Resorts in July 2020 to create one of the largest casino and entertainment companies in the U.S. Besides eight hotel casinos on the Las Vegas Strip, the newly combined companies have regional casino properties spread across 16 states.
A more recent move by Caesars revealed more of management's overall strategy. The company is acquiring British bookmaker William Hill (OTC:WIMHY) (LSE:WMH) for $3.7 billion, with the transaction expected to close in the second half of 2021. Caesars already has a 20% stake in a U.S. joint venture with the British company, and will use full ownership "to fully maximize the opportunity in the sports betting and gaming sector" in the U.S.
Caesars has a multi-year relationship with the ESPN sports network and will integrate William Hill's betting lines into a new agreement. William Hill also already has a relationship with CBS Sports. Between its Las Vegas casino presence, the ability to grow regional sportsbooks, and expanded media ties with the ownership of William Hill, Caesars has put itself at the forefront for capitalizing on growth in legal sports betting in the U.S.
An international presence
Flutter Entertainment may not be a household name, because it is based outside the U.S., and listed on the London Stock Exchange. But investors should get comfortable with this international stock, as it has a large cash flow base it is using to expand what is more of a household name in this country.
Flutter is the owner of FanDuel, one of the best known fantasy sports and online sports betting apps in the U.S. Rival DraftKings (NASDAQ:DKNG) is another way to invest in this area, but DraftKings is a pure play with more risk, and a much higher valuation. DraftKings has yet to make a profit, and with its current market capitalization of over $22 billion, it is trading at over 50 times sales.
At close to four times sales, and with a base of businesses much larger than just FanDuel, Flutter has cash flow it can use to continue to build its U.S. betting segment. FanDuel has a partnership with U.S. regional casino operator Boyd Gaming (NYSE:BYD). Boyd operates 29 casinos in 10 states, with FanDuel retail sportsbooks helping to grow its online customer 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. These divisions can funnel cash to the U.S. division to support FanDuel's growth.
Under the radar
The MGM Resorts name may be well known, but its BetMGM joint venture with GVC Holdings (OTC:GMVH.F) is less so. Yet the sports betting and online gambling app that was launched in March 2020 is growing. New partnerships with professional sports teams, including the NFL's Denver Broncos, Las Vegas Raiders, and Tennessee Titans, will help connect the retail casino presence to the online customer base.
Restrictions from the pandemic have severely affected the majority of MGM's business. Las Vegas casino revenue dropped 80% and MGM China revenue plunged 95% in the company's second quarter ending June 30, compared to the previous year. Investors betting on MGM can't just rely on the BetMGM online growth. A recovery in the retail casino business has to be part of the investment thesis. If the casino business recovers successfully, MGM should have another growth engine in its future with its online betting app.
A timely bet
Investing in one of the sectors hardest hit by the COVID-19 pandemic may seem risky right now. A bet on Caesars and MGM Resorts must include the belief that the retail casino operations recover to pre-pandemic levels. But knowing there is also a strategy under way to grow their sports betting presence makes it a good time to make that bet. Flutter gives investors a stake in FanDuel's U.S. growth, while a steady overseas presence helps fund that growth.
With 18 states having already legalized sports betting, and the upcoming election likely to add more, investing in these three players may make a very timely long-term bet.