The sports betting business is hardly anything new. It's been done for decades now -- often illicitly. And ever since the U.S. Supreme Court lifted the federal ban on sports-based wagering back in 2018, the industry has grown even more. The Sports Business Journal reports that sports betting in the U.S. totaled nearly $121 billion last year, up 30% from 2022's tally of $93.3 billion.
If you think the bulk of the sports betting market's growth is in the past, however, think again. Although well over half of the country's states have now legalized gambling on sporting events, the business itself is still in high-growth mode. Why? Because wagering middlemen continue educating and attracting would-be betters, while states themselves are still expanding their betting permissions.
More importantly, there are still prime stock opportunities for investors to plug into for exposure to this growth. Three top names come to mind.
A tailwind is blowing for sports betting
To their credit, plenty of casinos and entertainment-tech companies were ready for 2018's ruling from the nation's top court. Negating the nationwide ban on sports betting, however, didn't inherently make it legal everywhere. It simply pushed the matter back to individual states' discretion. Some immediately allowed it. Others were slower to jump on board.
Most states are now on the bandwagon, though -- at least to some degree. The Motley Fool's own in-house research says a total of 38 states now permit sports-based wagering of some sort although many of those states only allow in-person wagering. Other states limit the kind of sports betting that can be done.
Nevertheless, there's one overarching reason investors have good reason to believe the sports betting business has miles to go before reaching its peak altitude: Cash-strapped states are finding that a good amount of revenue is generated by taxing sports bets. The Motley Fool's findings indicate that states have collectively banked a total of $4.3 billion in tax revenue since 2018, when the Supreme Court finally made the controversial decision.
That's not a huge amount. Yet, given that the states themselves collectively owe trillions of dollars right now, every dollar helps. Augmenting the need for more state-level tax revenue is the recent rise in interest rates, which makes borrowing money more expensive for individual states as well.
Moreover, while most states now permit some sort of sports betting, you should know that two big ones don't -- at least not yet. That's Texas and California. These states alone account for about around one-fifth of the nation's population, and are also tourist destinations that would-be gamblers might visit to place bets. If and when these states legalize sports betting, it could prove explosive for the business.
In the meantime, know that new legalization measures are at least being considered in five states at this time. With that as the backdrop, three particular companies are well-positioned to capitalize on the industry's prospective growth.
The best-of-the-best sports betting stocks
Some companies are better positioned than others to benefit from the sports wagering industry's likely growth. DraftKings (DKNG -0.65%) and Flutter Entertainment (FLUT 0.73%) are two of these names.
You're likely familiar with DraftKings. The company was founded back in 2012 as a site to play fantasy sports; adding online sports wagering to its offerings was a fairly seamless fit. The company is not yet profitable, but it's quickly moving in that direction and should be out of the red beginning next year.
DKNG Revenue (Quarterly) data by YCharts
The big key to this success is scale. DraftKings finally has it. That's making its growth more efficient. Over the course of the past couple of years, its average acquisition cost per-customer has fallen more than 40%.
Data source: DraftKings' November 2023 investor presentation.
In turn, gross margin rates (in step with revenue) continue to swell the longer that DraftKings is present and doing business in a particular state.
Image source: DraftKings' November-2023 investor presentation.
As for Flutter, you may be more familiar with it than you think. This is the parent to DraftKings rival FanDuel, and it only became a publicly traded entity in January. It's a close copy of DraftKings, for better and for worse. Both organizations are poised for solid growth, though, largely because their sports betting services are offered right where people want them -- on their phone, via a simple app.
And yes, there's enough online sports betting to allow both companies to thrive. An outlook from research outfit Mordor Intelligence suggests the online sports betting market alone is set to grow at an annualized pace of more than 11% through 2029, in-line with estimates from Straits Research.
The potential for offline, in-person sports betting is just as compelling, though. Goldman Sachs says the United States' sports betting industry's revenue could swell from around $10 billion now to as much as $45 billion in the future -- driven by "a combination of new state openings and a higher share of the consumer wallet being spent on sports betting over time," according to Goldman's head of leisure and travel research Ben Andrews. That's bullish for all casinos that manage sportsbooks.
One more key player to watch is Penn Entertainment (PENN 1.13%). While it exited its acquisition of Barstool Sports, that was to make way for its partnership with a much bigger name: Walt Disney. Disney is allowing Penn to use the name of its powerhouse sports media brand ESPN to promote a new sports betting business.
While the deal is meant to be an online-only venture, it potentially brings tens of millions of ESPN's fans into Penn's fold, where they may also find an incentive to visit a Penn-owned brick-and-mortar casino.
Other companies may also benefit from the ongoing growth of sports wagering, of course. But these three are best-positioned to benefit the most. They've already proven they know how to create and then expand a betting business, and they've already got millions of proven sports fans in tow.
