Reader Question:
Online sports gambling has the potential to allow integrated gaming resort operators to scale their revenue dramatically beyond their physical footprint capacity. Do you see the online gambling opportunity evolving in a "winner take all" fashion or will multiple players capture a meaningful stake? Who do you think is best positioned at this early stage - established online betting companies or the integrated resort operators?
I have been amazed at the valuations being afforded to the online sports and casino betting operators in recent months. I understand that legalizing sports gambling across the country is going to expand revenue for the players in this space, as a lot of illegal bets will be moved over to legal platforms, but I think the jury is still out as to whether the ultimate profits generated from the increased revenue, and the impact on physical casino operations, will justify current valuations and expectations. Before I answer your question directly, let me share some thoughts on how investors might think about the profit potential for all of the competitors.
1) Although the “handle” (dollar value of all bets placed) of online sports betting is going to be a very large number, we need to keep in mind that very little of that trickles down to the bet taker.
The “revenue” generated from the handle (the pile of cash leftover after all winning bets are paid out) is typically a high single digit percentage of total bets taken. Out of that stack of money, each state is going to take a cut as a tax generator (this is why so many states are eager to accept bets in the first place). Some are more reasonable (Nevada takes 6.75% of revenue) than others (Pennsylvania takes a whopping 36%). And then don’t forget that casinos have operating expenses associated with sportsbooks, in the form of labor and technology.
All in all, let’s assume revenue equal to 8% of the total handle, a pre-tax operating profit margin of 50%, and a 15% average tax rate across the entire country. In that scenario, for every $1 billion of bets made, the casinos will net an all-in profit of $28 million. And they will have to pay income tax on that amount at the corporation level, which brings that figure down to about $22 million. Investors should think about that math when evaluating the public market valuations of the companies in this space.
2) If the gambling customer can whip out their phones and place bets on sports with an app, it certainly increases the odds that they will bet, but that is a double-edged sword because casinos have a lot of fixed costs and one of the ways they make money from their buildings is from ancillary revenue during an actual visit to their casino.
You visit to bet on a college football game on Saturday, but while you are there you eat at the buffet, have a few beers, and throw a few bucks on roulette during halftime. The casino winds up making more profit from that spending than they do on the actual sports bet itself. If you are betting from your couch at home, you eat your own food and drink your own beer. With a large fixed cost base, having less revenue being generated inside the four walls of your building is not the most efficient business model from an operating leverage standpoint.
Okay, so who do I think will be the winners in this space? I can easily see a handful of players taking the vast majority of the business. Penn National has dozens of physical properties scattered across the country (the most of anyone), so betters know them well. The online-only players like Draftkings and Fandual will get a lot of the folks who rarely visit casinos. That customer could also use the Fox app since they are watching on TV already. And a big chunk of the the Las Vegas business would seemingly go to MGM since they are the dominant casino operator on the strip.
So my guess would be that given the existing market positions and brands, those five would get the lionshare of the bets. How much? Hard to say, but it would not surprise me if the 80/20 rule roughly applies here.