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This Scenario Could Cause These 2 Gaming Stocks to Surge

By Parkev Tatevosian, CFA – Aug 18, 2021 at 10:47AM

Key Points

  • Illinois requires potential online sports bettors to register in person.
  • DraftKings established a strong presence in Illinois.
  • Penn National Gaming signed up over 50,000 players in 30 days from Illinois.

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Mobile sports betting is emerging as a fun, new way to place wagers.

Since the Professional and Amateur Sports Protection Act (PASPA) was overturned just over three and a half years ago, there has been a patchwork of legalization efforts across states to allow sports wagers. For example, Illinois legalized mobile sports betting in 2019, but with an interesting caveat.

Players who wished to place wagers at an online sportsbook would have to register to the site in person. Undoubtedly that clause was equivalent to throwing a bone to local casinos who opposed the legislation out of fear it would take players away from their casinos. Forcing players to sign up to online sites in person gives an edge to land-based casinos in acquiring new players. 

However, at the onset of the pandemic, Gov. J.B. Pritzker, rescinded the live registration requirement and allowed online sportsbooks to recruit players directly to their sites.

Three smiling people on their smartphones.

Image source: Getty Images.

Let the good times roll 

That led to a frenzy of marketing activity from DraftKings (DKNG -4.25%) and Penn National Gaming (PENN -0.61%), as they wanted to take advantage of the opportunity before it expired. The efforts worked, and Illinois quickly became one of the most lucrative states for mobile sports betting in the U.S. The good times ended in April when the governor's order expired, and he chose not to extend the timeline. 

DraftKings noted in its first-quarter conference call that Illinois had become its largest state for sports betting handle. (For the uninitiated, the betting handle represents the total value of wagers placed.) Indeed, of the 15 states that have legalized mobile sports betting so far, Illinois along with Pennsylvania are the two with the biggest populations.

Penn only launched its mobile sportsbook in Illinois roughly 30 days before the governor's order was set to expire. The company went on a promotional blitz and signed up 54,700 people in 30 days.

Importantly, customer acquisition costs are likely lower when you signup players online. It takes less persuading to get someone to click a link and sign up on a website than to ask potential players to drive down to a casino in order to register. DraftKings and Penn capitalized on the perceived disadvantage with the original rule that had likely dissuaded those staying far from casinos from physically registering. Mobile registration opened up a larger addressable market while also lowering costs to acquire players. 

What this could mean for investors

It's worth noting that after Iowa removed the in-person requirement starting 2021, Illinois and Nevada remain the only two states with legal mobile sports betting with an in-person signup requirement.

The reason behind the governor setting aside in-person registration was to give people another less reason to leave their homes and slow down the spread of COVID-19. Unfortunately, the delta variant is causing another surge in COVID-19 cases in the U.S. That raises the possibility that the governor may temporarily remove the in-person requirement again. 

If that happens, you can expect another marketing frenzy from these two gaming companies in an attempt to signup as many residents as they can before the next deadline is reached. As a result, it could cause shares of DraftKings and Penn to rise. Admittedly, this may be an unlikely scenario. Still, it is something investors should keep an eye out for as it can boost the companies' stock prices. That's also the risk in investing in gaming stocks, much of their fortune lies with regulatory approvals. 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Penn Entertainment Stock Quote
Penn Entertainment
$33.97 (-0.61%) $0.21
DraftKings Inc. Stock Quote
DraftKings Inc.
$14.20 (-4.25%) $0.63

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

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