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Sep 1, 2022

Online Sports Gambling Is Here Invest In Casino Companies Instead Of Betting

by Richard Morrison

Wayne Gretzky wants you to bet on sports. So do Edmonton Oilers star Connor McDavid and basketball great Kevin Garnett, all brand ambassadors for BetMGM. Along with gambling ads, sports telecasts now feature on-screen banners displaying odds and payouts, while announcers have switched from describing plays to discussing point spreads.

Single-game sports betting is now legal in most Canadian provinces. The change formally came last August 2021, when the federal government amended the Criminal Code to allow provinces to decide whether to permit a shift away from provincial lottery corporations’ only offering, parlay wagering—multiple wagers that are closer to a lottery—to single-game betting as found in Las Vegas. As anyone who’s watched a sporting event since then has noticed, most provinces approved the idea.

Legislators have recognized single-game wagering as a means of generating tax revenue, and directors of professional sports leagues who once opposed gambling have seen its potential as well. A February 2021 report from Deloitte estimated that Canadian gamblers could place $28 billion in wagers by five years after legalization.

Canadians appear to have a weakness for wagering. Canada ranks fourth among countries whose citizens gamble the most, behind only Australia, Singapore, and Ireland, says WorldAtlas, citing data from H2 Gambling Capital. The figures, based on all types of gaming, including poker, slot machines, horse racing and casinos, are generated by dividing the adult population by total gambling losses. There are, ahem, no figures for wins.

It makes sense that the online sports betting industry is likely to expand. Numerous market research studies say the industry’s revenue should grow by billions of dollars over the next few years. The market research industry has its own problems, however, and such rosy predictions must be taken with a grain of salt. Online market research “mills,” often based in developing countries, churn out hundreds of fake “reports” for sale at extravagant prices, presumably so western corporate clients can cite them in their investor presentations.

There is solid evidence of an expanding sports gambling industry in Canada, however. Sportsbooks—a term that blends sports with bookmaker—now available in Canada include BetMGM, Betonic, BetRegal, BetRivers, Betrophy, Betsafe, BetVictor, Betway, Bet365, Bet99, bwin, Caesars Sportsbook, Casumo, Coolbet, DraftKings, FanDuel, LeoVegas, MaximBet, Mise-o-Jeu+, NEO.bet, NorthStar Bets, Parimatch, Partysports, Play Alberta, PointsBet, Power Play, Rivalry, Silverplay, SportsInteraction, TheScore Bet, Thrillsy, TonyBet, Unibet, William Hill, 1Bet, 22Bet and 888sport, with more likely to come.

The flood of new sportsbooks will almost certainly lure more Canadians into gambling addiction. If you or anyone else you know is tempted to wager, remember that in the long run, the house always wins. Instead of wasting your money betting at a gambling site, buy the shares of its parent company. Wins will likely be small, gradual and require patience, but the odds of a total loss are much smaller.

Most publicly traded gambling companies still rely on business generated at physical casinos. After attendance, revenue and earnings were hurt during the early phases of COVID, beleaguered gambling stocks recovered briefly last year only to fall again, and some gambling companies are repurchasing their stock via buybacks. The purely online gambling companies that thrived during the pandemic are new and small, and while most report that revenue is growing, so are expenses, meaning profits have yet to appear.

Here are some North American gambling companies to consider:

DraftKings Inc. (DKNG/NASDAQ)

Boston-based DraftKings describes itself as a vertically integrated sports betting operator, with wagers taken on 15 sports in eight countries. The company launched its online sportsbook and casino products in Ontario in mid-May.

For the three months ended June 30, 2022, DraftKings reported revenue of US$466 million, up 57% over the US$298 million it reported during the same period in 2021. The company raised its fiscal year 2022 revenue guidance to a range of $2.08 billion to $2.18 billion. DraftKings improved its fiscal year 2022 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) guidance to a loss of between $765 million and $835 million from its earlier guidance of a loss of between $810 million and $910 million.

Penn Entertainment (PENN/NASDAQ)

Based in Wyomissing, Pennsylvania, Penn Entertainment has 44 properties in 20 U.S. states. Last October, the company paid US$2-billion in cash and stock for Toronto-based Score Media and Gaming Inc. TheScore Bet went online on April 4.

Penn Entertainment’s second-quarter 2022 results showed revenue of US$1.6 billion, up 5.2% over the same quarter of 2021. Net income fell to US$26 million, with a margin of 1.6%, down from US$198.7 million and a 12.9% profit margin in the second quarter of 2021.

MGM Resorts International (MGM/NYSE)

MGM Resorts has 32 hotel and gaming destinations around the world. The Company’s 50/50 venture with U.K.-based Entain PLC, BetMGM LLC, owns BetMGM and partypoker. MGM’s BetMGM Ontario sportsbook, launched April 4, was the 23rd jurisdiction in which a BetMGM product is available, the company said in a news release.

BetMGM’s second quarter losses grew to US$71.2 million, up from a loss of about US$46 million in the second quarter of 2021.

Parent company MGM’s second quarter revenue climbed to US$3.3 billion, up 44% over the US$2.3 billion reported in the first three months of 2021. MGM’s physical casinos were hard hit during the worst phases of the Covid pandemic and its share price reflected the drop. Since January, 2021, the company has repurchased a full 31% of its market capitalization.

Caesars Entertainment Inc. (CZR/NASDAQ)

Caesars Sportsbook went online in Ontario in early April. Parent company Caesars Entertainment owns and operates about 50 casino properties in 16 states and operates a hotel and casino in Windsor, ON.

For the second quarter of 2022, Caesars announced revenue of US$2.8 billion, up from the US$2.5 billion in revenue reported in the second quarter of 2021. Like other gambling companies, however, losses increased, rising to a deficit of US$123 million from a profit of US$71 million. The company’s balance sheet showed US$14.2 billion in debt against cash and cash equivalents of US$997 million.

Rush Street Interactive (RSI/NYSE)

Chicago-based Rush Street Interactive began trading on the NYSE at the end of 2020. The company has a Canadian presence through its BetRivers sportsbook.

Rush Street reported second-quarter revenue of US$144 million, up 17% over the same quarter a year ago. Net losses in the quarter were US$28.3 million vs. a loss of US$14 million in the second quarter of 2021.

Gambling ETFs

Exchange-traded funds (ETFs) offer investors a geographically diversified portfolio of stocks linked to the global gambling industry. Only a few fund families offer ETFs specifically focused on companies that may gain from the surge in online wagering.

Roundhill Sports Betting ETF (BETZ/NYSE Arca)

This fund, part of a family of seven ETFs offered by New York-based Roundhill Investments, was launched in June 2020 at a unit price of about US$16. The units rose steadily and spent most of 2021 at US$30 or more, then began a steep decline and recently slipped back to near their issue price. The fund’s US$138 million in assets under management is invested in 43 companies, including those that operate in-person or online sportsbooks, online gambling platforms and the tech companies that supply them. Roughly 32% of the fund’s portfolio is in U.S.-based companies. The fund carries an expense ratio of 0.75%.

VanEck Gaming ETF (BJK/NASDAQ)

This fund, launched in 2008, has US$69.3 million in assets allocated among 37 holdings, including companies with casino hotels, sports betting, lottery and gaming services, gambling technology and gambling equipment. Along with stock markets, BJK’s unit price climbed steadily during the pandemic and peaked last year. So far this year, the fund has nicely outperformed the Nasdaq, which means only that its unit price has merely slipped instead of plunging. Almost all the companies in its portfolio come from the consumer discretionary sector, with real estate names making up most of the rest. About 43% of its holdings are based in the U.S. The fund carries a net expense ratio of 0.62%.

Conclusion

The online sports betting industry is likely to grow dramatically, helping publicly traded gambling corporations generate revenue. Until profits appear, however, stakes in gambling stocks are only slightly less risky than playing their games. Growth-seeking investors may take a small position in a gambling stock or ETF, but like visiting a casino, only play with money you can afford to lose.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca