This could be the biggest Super Bowl ever for online betting. here’s why

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This year will be the biggest yet for the industry – and that’s because it’s the first Super Bowl since New York State legalized mobile sports betting.

But these betting operators may need to generate a lot of money in New York to turn things around this year. So far in 2022, like the rest of the market, most gambling stocks have not been winning propositions.

The popularity of legal sports betting has grown since 2018, when the Supreme Court ruled that all states could implement sports betting. But New York is an important step because it is a gigantic potential market. It is the fourth most populous state in the country and the largest to legalize sports betting.

So far, six companies have been approved to set up online sports betting in the Empire State: DraftKings, FanDuel, Caesars, Rush Street Interactive’s BetRivers, MGM and PointsBet.

Although this is good news, the shares of these companies have been hit hard lately. This is mainly due to concerns about companies spending on advertising to attract new customers. Casinos and other gambling stocks were also losers in 2021 for this reason.
Owner of FanDuel Beat (PDYPF), which is also the parent company of Paddy Power in the UK and Ireland, is down around 7% this year. So are the shares of MGM (MGM). DraftKings stocks, Caesars (CZR) and PointsBet have all plunged around 20% this month. And Rush Street Interactive fell 40%.

The house can eventually win after all

Wall Street, however, sees better days on the horizon. Morgan Stanley analyst Thomas Allen upgraded DraftKings shares last week to an “overweight” rating, which is essentially a buy.

Allen said in a report that early numbers from New York State show the industry is off to a good start and “remind us that the U.S. sports betting/iGaming market is likely to be very large, with only a handful of market share winners”.

He expects DraftKings to be one of those winners, “and with sentiment at an all-time low on near-term loss issues, we see now as a good time to invest for the long term.”

Now, you might be wondering what Allen means by “short-term loss concerns.” Isn’t gambling a profitable business where the house always wins? That’s generally true, but the problem these days is that the major gambling companies all spend a lot on promotional campaigns to try and attract customers, eating away at short-term profits.

Lots of money spent on star-studded TV commercials

Many gaming companies offer hundreds of dollars in free bets to attract new users. They also invest a lot of money in expensive commercial campaigns during the National Football League playoffs and other live sporting events.

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The list of famous spokespersons is long: Caesars has Halle Berry, JB Smoove and the famous Mannings of football: Peyton, Eli, Archie and Cooper. MGM has hired Jamie Foxx to tout BetMGM sports betting, while Wynn Resorts (WYNN) – which WynnBet is live in eight states but not in New York – has featured Ben Affleck and Shaquille O’Neal in TV spots.

DraftKings and FanDuel are also aggressively advertising, but with fewer celebrities.

Morgan Stanley’s Allen expects a jolt to be inevitable. Only a few companies are likely to come out on top in legal sports betting once the dust settles.

“While there has been a lot of negative headlines about promotional activity around the US sports betting industry, it has resulted in a highly concentrated market that should be positive in the long run,” Allen said. “Scale matters and to date it appears only FanDuel, DraftKings and BetMGM have been able to consistently gain outsized market share.”

He added that everyone is fighting to be in the top five in various markets. Including Penn National Gaming (PENN), the casino company that owns a large minority stake in the controversial Dave Portnoy’s Barstool Sports. Penn shares are down about 15%. Barstool is currently live in eleven states, but not in New York.
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There are plenty of opportunities beyond New York, however.

Macquarie Research analysts pointed out in a report this month that Ohio, Nebraska, Kansas, Vermont, Massachusetts, Missouri, Maine and Wisconsin could all legalize sports betting this year. And California, Florida, Georgia and Kentucky could follow next year.

“As a result, we expect 60% of the US population to have access to legalized sports betting in 2022, rising to 83% in 2023,” Macquarie analysts wrote.

This is one of the main reasons Macquarie upgraded Penn National Gaming shares to “outperform”.

“We believe the market places little or no value on the online business” of Penn and Barstool and they should not be ruled out as a potential winner in online betting, Macquarie analysts said.

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