Some investors might have thought that last week's Supreme Court decision that paves the way for legal sports betting in all 50 states would have resulted in skyrocketing stock prices of the largest perceived beneficiaries. And yet, the market reaction thus far has been fairly tame.
Consider Penn National Gaming (PENN), whose pending merger with Pinnacle Entertainment (PNK) will make it the largest regional casino operator in the United States. It stands to reason that from a customer destination perspective, they should benefit immensely from sports bets being taken outside of Nevada. And yet, PENN shares have moved up only marginally (less than 5%) since the ruling was announced:
So why isn't Penn stock soaring? Won't there be millions of bets placed at their casino resorts annually once the infrastructure is put into place? Probably, but it is important to keep in mind how much revenue these bets will likely generate for the sportsbooks (hint: it might be less than one thinks).
Americans wager about $5 billion in Nevada sportsbooks each year. It is not crazy to think that the market will be increased by many multiples of that if a dozen or two dozen states take steps to accept bets. With over 200 million Americans of betting age, it is not crazy to think the market could swell by a factor of 10. Annual wagers of $50 billion in total equates to about $200 from each and every American age 21 and over.
However, we must keep in mind that the $50 billion is a gross figure (the "handle" for the betting inclined). In Nevada, the historical hold percentage is around 5%, which is the amount the sportsbooks net after paying out winning bets. As a result, $50 billion of gross bets will generate revenue of just $2.5 billion. Still a hefty sum, but there's more to consider...
Many states, like New Jersey (which spearheaded the lawsuit that set this entire process in motion), are chomping at the bit to allow sports betting because they see it as a revenue generator. States typically tax casinos heavily in exchange for granting licenses to operate facilities that many constituents would prefer not exist. Those taxes are usually assessed on adjusted gross proceeds (total bets placed less winnings paid out), which eat into casino profit margins quickly. According to this article, while New Jersey taxes casino at just over 9% (among the lowest), most neighboring states charge far more, with New York at 31-41% and Pennsylvania at 16-55%.
So let's imagine that state legislators decide to tax sports betting revenue at an average of 30%. Now we have gone from $50 billion in "handle" to $2.5 billion of "pre-tax revenue" to just $1.75 billion of "after-tax revenue." With more than 500 casinos in the country (a Penn/Pinnacle combination would own 40 alone), each stands to generate some incremental revenue ($3.5 million per year, on average), but it will by no means be life-altering for shareholders. Perhaps that explains why Penn National stock is up only a few percentage points since the news hit.
Now, this of course only considers actual gaming revenue from the bets themselves. Resort operators will surely try their best to attract customers to visit frequently and spend some money on food, drinks, and perhaps some slot or table game play while they are there. The tricky part about that strategy, however, is that technology is likely going to play a huge role in nationwide sports betting.
Movie theaters and restaurants are already trying to figure out how to coax customers out to their properties when Netflix and food delivery services are just a few clicks away. The same will be true for the sports betting industry. MGM already has a mobile app for Nevada residents that allows in-state players to place bets from home (or anywhere else). Such capabilities will surely expand to other states now, so why not just watch from your couch and bet on your smartphone?
What is probably a slam dunk, though, is that engagement with sports teams should increase. That is good news for Disney (DIS), whose stock has firmed up lately despite worries about cord cutting and ESPN subscriber losses. ESPN viewership should increase (as can ad rates) as regular games have more importance to the average fan who might throw down twenty bucks on the outcome.
With engagement set to rise, there will be more money attached to these teams and franchise values should continue to rise, perhaps even faster than currently (if that is possible). In addition to Disney, stocks like Madison Square Garden (MSG), which owns the Knicks (NBA) and Rangers (NHL), could see increased investor interest.
All in all, this is an interesting time to be sports fan and market watcher. While there will be billions of dollars generated from legalized sports betting, it is likely that with so many players in the industry set to split the pot, outsized winners are less likely in my view. As a result, there might be very few pure plays from a stock market perspective. Instead, take a company like DIS or PENN or MSG, all of which have dominant franchises already, and assume that sport betting will help them at the margins increase shareholder value over the long term.