We are a long way from the days when neighboring governors and industry analysts predicted that online gambling tax rates in Pennsylvania would be so prohibitive that gambling operators wouldn’t even care. Pennsylvania is now the nation first iGaming state (in monthly revenue) and consistently among the top five states for sports betting.
In March, Pennsylvania became the third state, after Nevada and New Jersey, to top $1 billion in sports betting. And no state has produced more sports betting taxes ($253.0 million through May 2022). iGaming (online casinos and online poker) generated even more revenue and taxes. Until May 2022:
- AP iGaming GGR: $2.58 billion (Second highest in the United States)
- PA GGR sports betting: $1.06 billion (Third highest in the US)
Morgan Stanley recently released Online Casino Report 2021 sheds light on the future of online betting markets in the United States, with implications for online gambling stocks. The report also highlights the importance of iGaming for companies active in both sports betting and online casinos, and for the future. profitability expectations for these US-focused gaming brands.
iGaming superior to sports betting, but not in numbers
Even if they do not always benefit from the same media and legislative attention, online casinos make more revenue for operators for the state (by many) in relation to sports betting.
But the pace of iGaming legalization seems like a snail compared to the breakneck pace of online sports betting. Legal sports betting is currently online in 30 states (plus DC). Online sports betting is live in 20 states plus DC, with more launches imminent. During this time, only seven states offer legal and live online casino games (online slots and table games).
Morgan Stanley analysts predict the trend will continue, with fewer states passing iGaming legislation due to “less public and industry support, stronger industry opponents and the slow rollout to date”.
Projections for 2025:
- 11 iGaming Legal States
- 42 Legal Sports Betting States
State to state, operator and tax revenues from online casinos far exceed sports betting revenues. According to Morgan Stanley:
In states that legalize iGaming, we expect revenues to be about double that of sports betting.
This makes states like Pennsylvania, New Jersey and Michigan (the most populous iGaming states) desirable destinations for operators. The other winners in this equation are the state (and the local entities that benefit from gambling tax revenue) and government customers.
How much revenue will online casino and sports betting generate in 2025?
Despite the limited jurisdictions, iGaming revenue is expected to continue apace since Covid-19 stay-at-home orders accelerated the industry in March 2020.
Morgan Stanley’s report forecasts the following earnings for both verticals.
- Projected iGaming revenue for 2025 $7.8 billion ($300 million in 2018)
- Forecast sports betting revenues for 2025 $12.8 billion ($400 million in 2018)
According to projections, AP will continue to be among the national leaders in iGaming revenue in 2025 (New York is not included).
- Michigan: $1.495 billion
- New Jersey: $1.490 billion
- Pennsylvania: $1.460 billion
- Illinois: $1.336 billion
Distribution of the GGR PA 2021:
- iGaming GGR: $1.3 billion
- GGR sports betting: $505.5 million
Morgan Stanley is also planning PA GGR sports betting from $701 million for 2025. Based on the 2021 numbers, both projections look well within reach for the Keystone State.
Rising Tide of PA Online Gaming
According Eric Ramsaymarket analyst for PlayPennsylvaniaPA iGaming tracks more than 33% higher than 2021 through April, putting revenues in pace with $1.7 billion for 2022. And sports betting revenue is on track for a $560 million year, up to 10% over one year so far in 2022.
“Pennsylvania is shaping up to be the fastest growing iGaming market in the United States, and we haven’t seen the peak yet. While sports betting revenues are subject to seasonal changes, the local online casino industry has continued to show steady growth, even in the face of broader economic headwinds.
In March, PA and NJ became the first states to overtake $140 million in iGaming monthly revenue, which seems to be the new bar.
“Expect online casino revenues to continue to outpace sports betting in this market, and really every other market in which both are legally available. Pennsylvania demonstrates with particular clarity the financial benefits of making casino games available online, including for customers who typically prefer to gamble over sports,” Ramsey said.
Online casino increases operator profits
Looking at the entire US market, sports betting revenue will far exceed iGaming revenue in 2025. But that doesn’t tell the whole story of how important online casinos are to gaming operators’ bottom lines. .
As the Morgan Stanley report notes, operators are able to break even faster in states that have both sports betting and iGaming. This means they can achieve profitability sooner (even despite high tax rates).
Main operators, including DraftKings, FanDuel and BetMGM provide for “positive payback periods of 1 to 3 years”. More report details include:
- In New Jersey, DraftKings saw its profits increase in Year 3 (net gaming revenue of $239m; positive contribution of $68m or 28% of NGR)
- BetMGM saw positive contribution earnings in MI after 9 months. (This was helped by cross-selling, with around 75% of online sports bettors getting into the iGaming game.)
- DraftKings expects net profits to start 2-3 years after launch in a new state.
- FanDuel expects net profits to come into play 12-24 months after launch.
- BetMGM guides balance contribution profits to 12-24 months for online sports betting states and 10-14 months for iGaming states.
Many short-term investors have found these delays unacceptable, as evidenced by recent stock falls. In stock investing, however, patience is often rewarded in high-growth industries that are still in their infancy.
The “long game” for online gambling operators and equity investors
iGaming and sportsbook stocks covered by Morgan Stanley include $DKNG, $MGM, $PENN, $CZR, $BYD, $WYNN, $FLTR and $ENT. Overall, this group of actions:
- Outperformed the S&P 500 by 82% in 2020/1H21
- Underperformed by ~26% in 2H21 and by ten% Since the beginning of 2022
- Lost ~$2 billion on online sports betting and iGaming in 2021
- Expected to lose ~$3 billion on online sports betting and iGaming in 2022
The report attributes last year’s underperformance to investors’ fears that the industry will never be profitable. In response to this, Morgan Stanley also plans to:
- FanDuel and Penn National at achieve profitability in 2023
- DraftKings, BetMGM and Caesars at achieve profitability in 2024
A second chance to enter Amazon and Netflix early?
Morgan Stanley compared online gaming companies in the United States to other “high-growth, early-stage industries” like Amazon, netflix and Snap inc. For stock market investors willing to play the long game on the leaders in the online gambling market, this should be a welcome comparison.
AMZN, NFLX, and SNAP all experienced similar rocky transitions from revenue to earnings, but after quarters where they achieved significant margin outperformance, they returned 96% the following year, on average.
We believe that once sports betting/iGaming operators start demonstrating earnings in early key states, equities could follow a similar rebound in performance.
NJ, PA, and MI all fit the “key early state” description, and long-term profitability looks achievable in all of them – at least for the market leaders.
Morgan Stanley Projects U.S. Sports Betting/iGaming Market Leaders Will Deliver Around 25% long-term margins (24% in 2025 for DraftKings). These projections are based on other expected trends, including declining promotional spend and customer acquisition costs (CAC) and high lifetime value (LTV), or customer spend over time.
The advantage of cross-selling for online gambling operators
According to the Morgan Stanley report, iGaming legalization matters for corporate margins because sports betting and poker platforms are the easiest to sell in iGaming.
Some gaming companies have benefited far more than others from decrease in CAC due to cross-selling. DraftKings and FanDuel are the simplest example of this advantage as they were able to leverage their DFS Databasesreducing their CAC to about 2/3 of that of competitors.
Flutter-owned Stars Group was able to reduce CAC in early markets thanks to PokerStars. The same company now also benefits from the cross-selling of FanDuel DFS and sports at the online casino.
Since the launch of online casinos, gaming companies have also been cross-selling from loyalty databases on land-based casinos at iGaming. This “omni-channel” approach has proven successful for top PA gaming brands, including Penn National, Rush Street/Rivers, Caesars, and Boyd Gaming.
The same operators are also profiting from the cross-selling of retail sportsbooks to online sportsbooks and retail table games.
A hopeful future for US gambling stocks
In summary, higher margins (and profitability) should be achievable by iGaming/sports betting companies in the near future through:
- High/increasing LTV (with a focus on customer retention)
- Lower CAC (less marketing/promotional spend over time as markets mature; leverage cross-selling from other verticals, including land-based casinos)
- Legal iGaming shows where operators can offer the full omnichannel approach to help reduce CAC
As margins increase in the long term, the big winners in online gambling should see stock prices do the same. What happens in short-term stock prices, however, is anyone’s guess.
Main image via Shutterstock.