Companies with a presence in online gambling have taken the traditional gambling world by storm over the past year. Caesars Entertainment, MGM Resorts, Wynn Resorts and others with decades of operating history have been thrown by the wayside in favor of relatively new entrants that are still yet to become household names.
DraftKings, Rush Street Interactive, Golden Nugget Online Gaming, and even Penn National have been the hottest online gambling stocks and now have valuations that rival some of their Las Vegas Strip peers. So, should your bets be on one of the newcomers or an established name in gambling? Let's take a look at the industry today.
Image source: Getty Images.
Where the gambling world stands today
To frame the comparison of online gambling companies, it's important to look at where the main players stand today. You can see below that DraftKings is by far the biggest online gambling company by revenue and valuation at Friday morning's prices, but Rush Street Interactive and Golden Nugget Online Gaming are growing quickly.
| Company | Market Cap | Revenue (TTM) | Revenue Guidance | Q4 2020 Growth Rate |
|---|---|---|---|---|
| DraftKings (DKNG 4.96%) | $25.2 billion | $614.5 million | $900 million to $1 billion | 146% |
| Rush Street Interactive (RSI 1.85%) | $3.3 billion | $278.5 million | $420 million to $460 million | 260% |
| Golden Nugget Online Gaming (GNOG) | $1.3 billion | $91.1 million | $130 million to $145 million | 48% |
| Penn National (PENN -1.92%) | $16.5 billion | $3.58 billion | N/A | (32.5%) |
| MGM Resorts (MGM -2.58%) | $20.6 billion | $5.12 billion | N/A | (60%) |
Data source: Company filings and Google Finance. TTM = trailing 12 months.
The table shows just how wild valuations have gotten in the online gambling business. DraftKings in particular is trading at more than 25 times 2021 guidance, and the company is far from profitable. Rush Street Interactive trades for a comparatively modest 12 times last year's sales, and Golden Nugget trades for 14 times.
Penn National has been another hot online gambling stock after partnering with Barstool Sports last year. But it has barely started rolling out its online gambling strategy, so it's hard to judge the business today.
What you'll notice is that there's no shortage of competitors in the market and no one is actually making a profit in online gambling. So what should investors be looking for?
Market domination will be key
Like most tech stocks, scale is going to be everything for online gambling, so taking market share early will be critical. Building games and being approved by regulators requires upfront fixed costs, but variable costs will be extremely low because online gambling is simply a cloud technology platform.
Where we could see the most leverage is in sales and marketing expenses. Right now, DraftKings and MGM Resorts seem to be building partnership networks with major sports leagues and high-profile partners that aim to drown out the competition. To keep up, smaller online gambling sites will need to offer more user incentives, better odds, differentiated games, or other innovations that can attract consumers.
The other online gambling stocks
The big betting sites aren't the only ones involved in online gambling. Gan Ltd. is a solutions provider for most of the major online gambling sites. The company has built a suite of products that include customer account management, regulatory reporting, payment services, identity verification, and proprietary games. The company's revenue was just $35.2 million in 2020, but management expects 2021 revenue of $100 million to $105 million as partnerships with Wynn Resorts, Churchill Downs, Penn National, and many others start to kick in. This is a company that can ride the wave of online gambling growth without taking the risk on one operator winning long term.
FuboTV is another company that's looking to leverage its sports viewing audience into a sports betting business. The company says it will launch a sportsbook this year and that could lead to additional revenue. But it's still unclear exactly what role FuboTV will play in this increasingly competitive market.
There are a lot of other stocks traded in the U.S. or abroad that could also play a big role in online gambling. The Stars Group, Flutter Entertainment, Entain, 888 Holdings, Genius Sports, and many more play a role in online gambling around the world. But here I've focused on the main U.S. traded stocks that I think have the potential to grow.
Where to place your bets today
Given that scale is important in online gambling and companies aren't making money yet, there are two stocks that stand out as winners to me in this space: MGM Resorts and Gan Ltd.
MGM Resorts is one of the market leaders in every state where it's licensed, and it's expanding as quickly as any online gambling operator. And it has partnerships with the NBA, MLB, NHL, MLS, Nascar, PGA Tour, Buffalo Wild Wings, Topgolf, and more. It's flooding the market and has the capital to capture a large share of it.
The other stock I like is Gan. The company has the benefit of being able to grow along with smaller operators like Penn National, Wynn, Churchill Down, and others, so it's a bet on the overall industry growing. And it offers the underlying technology and services that all betting companies will need without taking the risk of taking bets itself.
Online gambling is a hot business today, but sometimes the highest-flying stocks won't be the long-term winners. I think MGM Resorts and Gan offer the best balance of low risk with a lot of upside reward as the industry grows.
