Earlier this year, the US Supreme Court struck down a 1992 federal law banning sports gambling, leaving individual states free to make their own decision on the matter.
ESPN estimates that 28 states are in the process of legalising sports betting, while several, including New Jersey and Nevada, have already done so. Utah, where even the lottery is banned, is thought to be the only state which is unlikely to reverse its anti-gambling laws.
Still, with 49 out of the 50 states at least open to the idea, the US sports betting market has the potential to be one of the biggest in the world, worth billions of pounds to gambling companies.
William Hill share price not reflecting US potential
William Hill has been in Nevada for a while now, and its track record (50% of online gambling in Nevada is done through its sites) means the US opportunity is “attractive and credible”.
The Swiss bank thinks the US business will total roughly £2.4bn by 2023, although it is not convinced that the share price reflects this.
“Our what's priced in analysis suggests that the current share price can be justified without the US business, implying significant upside,” read the note to clients.
The analysts upped their price target to ‘buy’ from ‘neutral’, although they cut their forecasts and dropped their price target to 300p (from 330p) to reflect the slew of tax hikes and limits for betting machines due to come into force next year.
Paddy Power’s core UK business still disappointing
Unlike William Hill, Paddy Power had never established a US operation until it bought fantasy sports site FanDuel shortly after the Supreme Court’s decision.
UBS reckons the merger adds as much as £1.25bn to the group’s value, and potentially a lot more if FanDuel is able to increase its market share if the market opens up faster than expected.
“We believe [Paddy Power is] well positioned in the US with FanDuel, which combined with the market size potential means we see potential positive catalysts were we to get more comfort around the UK performance,” read the note.
That’s the primary concern. UBS thinks other betting groups may have enjoyed a better World Cup while its app lags behind several others in terms of download numbers.
This, when coupled with the tax changes in the UK, has led the analysts to chop their estimates and their price target, which falls to 6,950p (from 7,130p), although they move up to ‘neutral’ from ‘sell’, given the “more balanced risk reward”.
Morgan Stanley agrees on Paddy Power
Morgan Stanley number crunchers echoed those sentiments as they upgraded Paddy Power to ‘equal-weight’ from ‘underweight’.
“While it is hard to justify further multiple expansion relative to peers such as GVC and William Hill on a fundamental basis, we acknowledge that operational performance is improving, negative regulation is understood by the market, Paddy Power Betfair's US business is seen as a key play on the attractive US opportunity, and M&A upside risk is increasing, in our view.”
Similarly, the US investment bank has also cut its forecasts to include the latest regulatory changes announced by the Chancellor this time last week.
But the price target did get a little boost, up 100p to 6,600p, although that still leaves it well short of the current market price.
Paddy Power shares were down 1.6% to 6,920p, while William Hill dropped 1.9% to 217p.