The US sports betting and iGaming market are on track to top US$30 billion in yearly revenue in the coming years, just five years after the US Supreme Court ruled in favor of sports betting in 2018.
So far, 35 states have regulated some form of sports betting or online gaming activity, most of which is catered for by the 'big three' of sportsbook providers: Draftkings Inc (NASDAQ:DKNG) (Draftkings Inc (NASDAQ:DKNG)); FanDuel, which is owned by Flutter Entertainment PLC (LSE:FLTR); and BetMGM, a joint venture between MGM Resorts International (NSX:MGM) and Entain PLC (LSE:ENT).
Size of the US sports betting market
In the first half of the year, revenues for the US sports betting and iGaming market grew 50% to US$8.12 billion, according to the latest report from the American Gaming Association.
This implies that annual revenues are on track to rise from US$12.5 billion last year to US$17 billion in 2023, analysts at broker Shore Capital said.
Based on circa $100 revenue per head, the analysts forecast that embedded growth from the existing 35 states will see last year's figure doubled to around US$25 billion over the next three years, of which they see US$14 billion from sports betting, US$7 billion from iGaming and potentially US$4 billion from Canada.
"This would arguably be at the lower end of the growth profile set out to 2025 at Flutter’s recent interim presentation," wrote analyst Greg Johnson, with the FanDuel owner assuming an increase in access to sports betting of circa 4% and 5% of the population in 2024 and 2025 respectively.
More states are continuing to push through regulation, with the major trio of California, Texas, and Florida potentially "moving the dial", as they account for around 28% of the US population, with a further 10% or so from the other five other states that have yet to regulate.
They predict the eventual market opportunity to gallop past US$30 billion in the medium term and eventually canter towards US$40 billion.
Betting on revenue and earnings
Based on company data and assumptions, FanDuel currently has 80% US market penetration in sports betting and 25% in iGaming, DraftKings 65% and 30%, and BetMGM 80% and 38%; while FanDuel has a 43% total addressable market (including Canada), DraftKings 35% and BetMGM 37%.
“Based on annual revenues of US$30-40 billion and a potential margin of circa 25-30%, industry EBITDA could reach US$8-10 billion per year,” Johnson wrote.
Valuing this income stream at 10-12 times earnings, or three times net gaming revenue, would be a potential total market equity valuation of US$100 billion.
This, the analyst noted, is around three times larger than the combined adjusted market values of the “Big 3”.
DraftKings, FanDuel and BetMGM all recently reported progress towards profitability, the analyst noted, with DraftKings and BetMGM cutting losses amid the ongoing drag from new state launches.
Looking forward, it was noted that DraftKings significantly reduced its full-year expected losses, including an expected material EBITDA contribution in the fourth quarter.
"In the absence of one of the big three states launching sports betting over the next year (which seems unlikely at this stage), we would anticipate a step-change into profitability in FY24F."
He added that as new states mature and the overall player base builds, "the proportionate drag from newly acquired customers (and consequently also new states) dissipates, which should support improving cost of sales, marketing and overhead ratios, driving profit margins higher".
Disney threat?
As the largest and best-known sports media platform in the US, a move into sports betting for ESPN, owned by The Walt Disney Company (NYSE:DIS), was widely anticipated due to its content, customer base, and background.
Although there is a conflict with the well-cultivated family image of the parent, a tie-up was recently agreed with Penn Entertainment, the regional US casino group.
"ESPN is arguably the 800-pound gorilla for the sports betting industry," said Johnson, noting potential parallels with the success of SkyBet in the UK and its relationship with broadcaster Sky Sports.
The move, which also sees Penn divest its existing sports betting brand Barstool, could be "more Phantom Menace than Empire Stikes Back", the analyst added.
This is because Penn is currently a "distant player" with a close to a 2% market share in sports betting, having not gained much traction from its Barstool acquisition.
But providing market access from live operations in 17 jurisdictions, and ESPN's balance sheet backing, the big question is will this new entrant be willing to plow in the significant upfront investment required, especially given the significant losses incurred to date by the existing Big Three building these market positions.
As the Big 3 are now closing in on the tipping point of profitability, with combined half-year revenues of almost US$5 billion and an estimated marketing expenditure of some US$1.5 billion in the six-month period, the analyst estimated that Penn "will need to generate some US$500 million of annual sports betting revenues to recoup the annual ESPN fee alone".
This is before additional associated marketing costs and overheads, which are already running at circa US$1 billion per year for FanDuel.
As such this "may prove prohibitively expensive" for Penn, said Johnson, although he anticipates the overall combined market share for the existing Big 3 is likely to moderate from current elevated levels, with Penn and Caesars to grab a "notable share" in the shake-up.
He also noted "with interest", that US30 billion Fanatics, which is operational in four US states, has acquired PointsBet’s US division.