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After New Jersey’s Supreme Court victory in 2018, any state that wishes can legalize sports betting. So far, 20 states have done so, and many more are on the way.
What’s in it for the states? Well, they need the tax revenue. And the online gambling industry is willing to be taxed at exorbitant levels if it means widespread legalization.
Today, the legal U.S. sports betting market is just $1 billion, compared to the illegal market’s valuation of $150+ billion.
However, Macquarie, an Australian Investment bank, suggests that legal online sports betting will be available to 96% of the U.S. population by 2025.
This growth rate is possible because of the technology available today; Morgan Stanley expects over 75% of U.S. sports betting revenue will come from bets placed online by 2025.
Let’s examine the companies who are enabling and will benefit from this shift to online sports betting and gambling.
Best Sports Betting Stocks
#1. DraftKings (DKNG)
- Performance over 1-Year: 316%
- Market Cap: $27 billion
In April 2020, DraftKings went public via a SPAC. They became the only vertically integrated and pure-play sports betting company in the U.S. The stock is up more than 300% in its first year of trading.
In an interview with Jack Hough of Barrons, DraftKings co-founder and CEO Jason Robins said that the company aspires to be like Amazon: “They started selling books online, and fast-forward 20-something-years later, and there’s not much you can’t buy on Amazon.”
DraftKings reported a revenue increase of 146% year-over-year in Q4 2020, up from $131 million to $322 million.
The company recently raised its revenue outlook for 2021 by 25% to $1 billion due to its expectations for continued growth, the outperformance of its core business, and the newly launched states that were not included in previous guidance.
DraftKings’ rapid growth is due to its aggressive marketing campaigns, strong customer engagement, and growing commercial and strategic agreements with casinos, sports teams, and individual athletes.
The company’s average revenue per monthly payer was $65 in Q4 2020 – an increase of 55% YoY.
These are strong indicators given the 1.5 million unique paying customers that engaged with DraftKings each month during this same period.
All this growth, but what about profitability? Several analysts expect DraftKings to turn a profit in 2023, given the company’s recent forecast.
In each new state that DraftKings launches, there’s typically a 2–3-year investment period before it looks to turn a profit.
CEO Jason Robins says that profitability projections are difficult because it’s tough to predict the pace that new states will legalize gambling.
While legal sports betting is still in its infancy in the U.S., DraftKings has goals for international expansion and already has operations in 8 countries internationally, including South Africa and Gibraltar.
DraftKings’ Amazonian aspirations can be seen in how they attack new markets – like gambling on video games. The company will continue to be at the forefront of or actively create markets that don’t exist yet.
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#2. Penn National Gaming (PENN)
- Performance over 1-Year: 367%
- Market Cap: $19 billion
Penn National Gaming operates 41 gaming and racing properties in 19 states, but its growing exposure to sports betting has investors piling into the stock.
Penn acquired a 36% interest in Barstool Sports for $163 million in January of 2020 — hoping to turn the media company’s 66 million monthly users into sports bettors. So far, it’s working.
Penn launched the Barstool Sportsbook app in Pennsylvania and set a single-day record of 21,000 downloads, breaking both DraftKings’ and FanDuel’s daily records.
The app recorded $11 million in handle over its opening weekend in Pennsylvania.
Barstool’s loyal following of “Stoolies” will follow the company’s founder Dave Portnoy anywhere he takes them – and that destination will be Penn National Gaming for the foreseeable future.
Penn’s online presence, social media marketing, and growth potential are why we recommend it over the traditional gambling stocks like MGM Resorts (MGM) or Churchill Downs (CHDN).
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#3. Flutter Entertainment (OTCMKTS: PDYPY)
- Performance over 1-Year: 87%
- Market Cap: $36 billion
Flutter Entertainment is a United Kingdom-based global sports betting and gaming operator. While it owns several popular online gambling brands like PokerStars, Betfair, and Sky Bet, its 95% ownership stake in FanDuel is why it’s one of the best sports betting stocks.
The FanDuel sportsbook is now live in 10 states, achieving a 40% market share in U.S. online sports betting for Q4 2020.
Flutter’s bet on the U.S. market is paying off – the FanDuel owner said its total revenue rose 106% in 2020, in addition to growing its customer base by 19% during the year.
Bank of America analysts said Flutter will continue its fourth-quarter momentum into the start of 2021, claiming that Flutter is now the “undisputed leader” in the U.S.
CEO of Roundhill Investments, Will Hershey, made several interesting comparisons between DraftKings and Flutter (even hinting at a possible FanDuel spinoff), starting with Flutter’s $38 billion of enterprise value compared to Draftkings’ much lower $23 billion.
Then, Hershey turned to consensus 2020 revenues – Flutter achieving $6.3 billion (with a “b”) and DraftKings far behind at $550 million.
Mr. Hershey’s cherry on top is that FanDuel alone hauls in hundreds of millions more in revenue than Draftkings but only accounts for 15% of Flutter’s group total.
We’re still in the first inning of DraftKings vs FanDuel, but we’re off to an exciting start.
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#4. Churchill Downs (CHDN)
- Performance over 1-Year: 78%
- Market Cap: $8.9 billion
Churchill Downs was founded in 1928 and has evolved from one racetrack in Louisville, Kentucky, to a multi-US-state, publicly-traded company with racetracks, casinos, and online betting platforms.
Each year, Churchill Downs hosts the Kentucky Derby — the traditional first leg of the Triple Crown, which attracts people worldwide.
This historic company is not held back by traditions, though, and has embraced the booming online gambling market.
The company has two online platforms – TwinSpires for online wagering on horse racing and BetAmerica for sports betting and iGaming (online casino-type games).
Brick and mortar companies that effectively navigate the Digital Transformation Era will be rewarded.
If Churchill Downs can get its loyal patrons on its online platforms, the stock will continue to outperform the broader U.S. market.
Alternative to Sports Betting Stocks
There are other ways to gain exposure to this high-growth sector, such as thematic ETFs or investing in the infrastructure or developers of betting and gaming software. Let’s consider some alternative to betting stocks:
Roundhill Sports Betting & iGaming ETF (BETZ)
- Performance over 1-Year: 57% (launched in June 2020)
- Expense Ratio: 0.75%
Roundhill Investments created the first index globally designed to track the performance of the sports betting and iGaming industry.
It has 40 constituents spread across 14 countries, investing 33% of the fund in “Sportsbook”, 30% in “iGaming”, 20% in “Technology”, and 17% in “Other”.
BETZ holds companies like DraftKings, Penn, and Flutter, in addition to the less recognizable international names like Kindred Group and PointsBet Holdings.
We like Roundhill because it offers targeted exposure to the investment themes of tomorrow — the firm has an eSports ETF (ticker: NERD) and a streaming ETF (ticker: SUBZ). We also give Roundhill a 10/10 rating on its ticker symbols.
VanEck Vectors Gaming ETF (BJK)
- Performance over 1-Year: 48%
- Expense Ratio: 0.66%
This fund is much older than BETZ, launching in 2008 to provide investors with exposure to the gaming industry at large.
However, the fund has added technology firms and sportsbook operators as gambling laws have changed during its lifespan.
Today, BJK’s top holdings include DraftKings, Las Vegas Sands, Galaxy Entertainment, and Flutter. The fund invests in 44 companies across +15 countries.
B2B Platform Services: Kambi (KAMBI) and Gan (GAN)
Kambi and Gan provide business-to-business software and services to the companies above in this article.
They are facilitating the U.S. casino industry’s ongoing digital transformation in addition to developing the robust software that powers DraftKings and FanDuel.
Investing in Kambi or Gan is a bet on the continued rise of online gambling.
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How to Research Sports Betting Stocks
The Motley Fool is the best source of information for sports betting stocks. Its team of research analysts and contributors will tell you when DraftKings is overextended and when it’s a good time to buy.
Unlike other stock advisory firms that give general advice, the Motley Fool provides actionable advice which helps its readers buy and sell securities with conviction.
Learn More: Motley Fool Review
Sports Betting and Gambling Stocks FAQ
What are the best gambling stocks?
Draftkings is the best pure-play investment in the rising legal gambling market in the U.S.
However, Flutter Entertainment owns FanDuel (DraftKings’ main competitor) and several other gambling brands worldwide.
Is sports betting a good investment?
Individuals looking to invest in sports betting should be aware of the changing legal landscape in the space.
Sports gambling has only been federally legal in the U.S. since 2018, so many states are still catching up to the new laws.
Bottom Line: Sports Betting Stocks
We believe this is a unique opportunity to invest in an ecosystem that’s still in its infancy — legally and technologically speaking.
Currently, the U.S.’s illegal gambling market is valued at $150+ billion compared to the legal market valued at around $1 billion, so there’s plenty of room for growth on the right side of the law.
It’s unclear when or how much these two markets will flip, but nonetheless, it’s an attractive investment to those looking for asymmetric return potential.
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Sean Graytok owns shares of Draftkings Inc.