Taxation has become a critical factor for the gambling industry in the United States, impacting operators' profitability and market strategies.
According to a recent note from Berenberg, the introduction of progressive tax rates in Illinois has underscored the significant cost burden that taxes impose on gambling companies.
The recent Illinois tax changes unsettled the sector and in turn the share prices of larger operators Draftkings Inc (NASDAQ:DKNG), Flutter Entertainment PLC (LSE:FLTR), and Entain PLC (LSE:ENT).
It also led investors to reassess the long-term profitability of these companies. The market reaction highlights the sensitivity of gambling stocks to changes in taxation, as these costs directly influence the financial health of operators.
Risks and diversification benefits
Berenberg identifies several key states where potential tax changes could further impact the industry. New Jersey, Pennsylvania, and Michigan are particularly crucial for iGaming, while New York and Illinois are significant for sports betting. These states contribute substantially to the Gross Gaming Revenue (GGR) of major operators, making them focal points for regulatory scrutiny and potential tax adjustments.
To mitigate state-specific risks, major operators such as DraftKings and FanDuel benefit from diversified operations across multiple states. This diversification helps cushion the impact of adverse regulatory changes in any single state, ensuring a more stable revenue stream.
Earnings impact
Berenberg said higher taxes in iGaming states pose a considerable risk to earnings, especially in high-revenue states like New Jersey and Michigan. Operators may need to adjust their operational strategies, such as reducing marketing spend, to offset increased tax costs, the US bank said.
However, this approach is more feasible for larger operators with significant market presence and financial resources, whereas smaller operators may struggle to maintain profitability.
Share performance and investment ratings
The recent tax changes have led to notable declines in the share prices of major gambling companies. Since mid-May, shares of Flutter Entertainment have fallen by 10%, DraftKings by 19%, and Entain by 21%. These declines reflect broader market concerns about the sustainability of earnings in the face of higher tax obligations.
Despite the current market volatility, Berenberg remains optimistic about the long-term prospects of key players in the gambling industry.
The firm rates Flutter and Entain as "Buy," citing their strong market positions and ability to navigate regulatory challenges. DraftKings, while also a significant player, receives a "Hold" rating, reflecting a more cautious outlook given the recent tax changes and their potential impact on profitability.