Bet On It: DraftKings flips script and abandons gaming tax surcharge

Welcome to the latest edition of “Bet On It,” where The Fly looks at news and activity in the sports betting and iGaming space.

SECTOR NEWS: MGM Resorts (MGM) and Grupo Globo announced the formation of a new venture to seek a sports betting and iGaming license in Brazil. If its license is approved later this year, the new venture will launch in Brazil in early 2025 under the BetMGM brand. Brazil has more than 20M active bettors representing an estimated market size of more than $3B, growing double digits every year. The venture will establish its headquarters in Sao Paulo and elect a leadership team to be comprised of top talent from each company and additional new hires to oversee the venture’s ongoing operations and growth. Commencement of the new venture’s operations is subject to local gaming regulatory approvals.

Shares of Caesars (CZR) were up over 12% following the news that Carl Icahn’s Icahn & Co. took a stake in the company during the second quarter, citing a 13F filing disclosed by Icahn.

Genius Sports (GENI) has been appointed as the Premier League’s Semi-Automated Officiating supplier. This agreement will improve offside decision-making in the most watched football league in the world, with a focus on enhancing the experience for fans, players and officials.

Playtech (PYTCF) noted the recent media speculation that it is in discussions with Flutter Entertainment (FLUT) regarding the potential sale of the Snaitech business for a value that could be about GBP 2B. “Playtech confirms it is in discussions with Flutter and has granted Flutter a period of exclusivity to complete due diligence and finalise the necessary Transaction documentation,” the company said in a statement.

NO TAXATION: DraftKings (DKNG) said in a post last night on X: “We always listen to our customers and after hearing their feedback we have decided not to move forward with the gaming tax surcharge. We are always committed to delivering the best value in the industry to our loyal customers.” Truist said DraftKings announced it will reverse course and not implement its recently announced online sports betting surcharges after other competitors stated they wouldn’t follow its lead, and immediately after FanDuel said the same. The reversal should remove some uncertainty around execution risks, but also raised the question of how DraftKings can offset the impact or if guidance needs to be tweaked, the analyst told investors in a research note. The firm thinks the recent DraftKings stock underperformance may reflect a more bearish view around surcharge risks which now appear not applicable. It keeps a Buy rating on the shares with a $50 price target. Additionally, Jefferies believes DraftKings’ decision is likely to generate a positive reaction in the shares. The firm believes online gambling operators can mitigate reasonable tax increases gradually over time, which should be the case for DraftKings. The decision “simplifies the path forward for the market and the stock,” said Jefferies, which calls DraftKings a top pick in a “favored group.” It views the stock as “easier to buy” given the surcharge decision and keeps a Buy rating on the name with a $54 price target.

EARNINGS RECAP: Gambling.com (GAMB) experiences a beat and raise quarter in Q2. The company said, “Gambling.com Group today updated its 2024 full-year revenue and Adjusted EBITDA guidance. The Company now expects full year revenue of $123 million to $127 million and Adjusted EBITDA of $44 million to $47 million. The midpoints of the new full year revenue and Adjusted EBITDA guidance ranges represent year-over-year growth of 15% and 24%, respectively. The Company’s updated outlook compares to the guidance provided on May 16, 2024 for revenue of $118 million to $122 million and Adjusted EBITDA of $40 million to $44 million.” Craig-Hallum raised the firm’s price target on Gambling.com to $14 from $12 and kept a Buy rating on the shares. After Google’s “Inappropriate Content Policy” changes in April increased near-term business uncertainty, the company once again showed its operational prowess by quickly and effectively responding which was evident in outperformance from its owned assets subsequently, the analyst noted. The firm reminds investors that customer interest in online gambling has never been higher.

Flutter’s second quarter results far surpassed last years figures in terms of EPS and revenue. Peter Jackson, CEO, commented: “Flutter delivered another strong quarter, beating consensus and increasing our revenue and Adjusted EBITDA guidance as we continued to capitalize on our global scale and the Flutter Edge. Our US performance was excellent in new and existing states reflecting our disciplined approach to customer acquisition and our best-in-class product, which offers our sportsbook customers the best pricing in the market. We continue to make improvements to our proprietary product offering which drove the proportion of live betting handle to be more than 400 basis points higher than last year during the NBA playoffs, while we also increased our MLB parlay penetration. The returns we are seeing give us the confidence to continue driving customer acquisition in the second half, building a bigger business, which bodes well for 2025 and beyond. We look forward to setting out this growth potential in more detail, and the capital allocation opportunities that will unlock, at our Flutter Investor Day in New York on September 25.” The company also issued a statement regarding surcharges in conjunction with the Q2 release on Tuesday. Flutter Entertainment said in its earnings release, “During Q2, the Illinois Gaming Board announced an increase in gaming taxes which became effective from July 1, 2024. We expect to directly mitigate 50% of the cost in 2025 through locally optimized promotional and marketing spend. This is prior to second order mitigation impacts such as in-state market share gains, which we have typically observed market leaders such as FanDuel to benefit from over time when regulatory changes are introduced.” Shares grew over 10% on Tuesday. Wells Fargo increased its price target on Flutter to $224 from $218 and reiterated an Equal Weight rating on the shares. The firm noted the company posted an “impressive” 15% Q2 EBITDA beat, with upside both in U.S. and ex-U.S. on a combo of strong execution and favorable hold. U.S. EBITDA guidance was raised 4%, despite a second half of 2024 IL tax drag of about $40M, Wells said, pointing out that Flutter is not imposing a surcharge. Also, Oppenheimer elevated the firm’s price target on Flutter to $255 from $240 and backed an Outperform rating on the shares after management raised 2024 EBITDA guidance by 3% on accelerating global players, higher parlay penetration and strong U.S./U.K. iGaming. Next catalysts are state data reports and September 25 Investor Day, with key debates focusing on U.S. iGaming share, tax contagion, and shareholder returns, the firm added.

Melco Resorts & Entertainment (MLCO) fell short of analyst consensus for EPS, but was able to surpass revenue expectation in its Q2 report Lawrence Ho, chairman and CEO, commented, “Our strategic initiatives to expand revenue and profitability, and drive growth continued to evolve in the second quarter of 2024. We are investing in people and incorporating enhancements to our properties to provide the best premium experience available in Macau to our patrons. We’ve seen growth in GGR quarter-to-quarter and year-over-year, and our teams are focused on driving continued expansion of our market position.City of Dreams Manila in the Philippines has consistently exhibited solid results. City of Dreams Mediterranean and our satellite casinos in Cyprus built upon the momentum seen in the past quarter, with luck adjusted EBITDA growing more than 30% quarter-to-quarter.”

Sportradar (SRAD) shares jumped 13% following its quarterly release in which the company boosted it FY24 revenue and adjusted EBITDA outlook. Carsten Koerl, CEO of Sportradar, said: “Our strong second quarter results, including another quarter of record revenues are a testament to the operating momentum we are generating across our business and the clear execution against our strategies to drive outperformance versus the market. We delivered robust growth across our high-value product portfolio and strong client uptake, while continuing to strengthen our business by driving efficiencies and significant cash flow. I am pleased to once again raise our full year guidance as we continue to build long-term shareholder value through strong topline growth, a focus on delivering additional operating leverage and increasing cash flow generation.” Jefferies upgraded the stock to Buy from Hold with a price target of $16, up from $12. The analyst contends the company has made “notable progress” in demonstrating the durability of the business model and its leverage to online sports betting growth in the U.S. and globally. Industry dynamics favor an inflection in U.S. in-game betting, which benefits Sportradar’s core data offering, the analyst told investors. The firm believes Sportradar has become “increasingly attractive within an already appealing sector.”

STATE UPDATE: Oregon was the first to release full July data, showing a significant year-over-year increase in handle and gross gaming revenue, or GGR, of 32% and 47%, respectively, with margins improving by 1.1 percentage points to 11.4%, according to Jefferies. In New York, data for the first four weeks of July indicated that margins are up by 0.7 percentage points year-over-year to 11.6%, with handle and GGR growth running at +29%. With nearly all states reporting full second-quarter online sports betting data, key trends have emerged: growth accelerated in Q2, with market handle and GGR up 37% and 40% year-over-year, compared to +26% and +26% in Q1, the firm told investors. New states contributed 8% and 10% to growth, while underlying same-state growth was 29% and 30%. GGR margins remained strong at 10.1%, growing by 0.2 percentage points year-over-year despite facing the toughest comparison of the year. The promotional environment eased in Q2, with free bets as a percentage of handle decreasing by 0.2 percentage points year-over-year to 2.8%. DraftKings took the top spot for OSB handle in Q2 2024, with its share rising by 3 percentage points year-over-year to 38%. FanDuel’s share was flat at 37%, followed by BetMGM, whose share decreased by 1 percentage point to 7%. However, after deducting payouts, FanDuel remained dominant in GGR share, which was flat year-over-year at 42%, according to Jefferies. DraftKings followed with a GGR share increase of one percentage point to 30%. BetMGM saw its GGR share fall by two percentage points to 6%. After accounting for free bets, FanDuel held an even larger 53% share of net gaming revenue, down one percentage point year-over-year. DraftKings’ NGR share grew by one percentage point to 31%, with BetMGM flat at 7%. All states have reported full Q2 iGaming data, showing that market-wide GGR increased by 25% year-over-year, consistent with Q1’s 26% growth. With no new state launches, this growth was entirely on a same-state basis. The three largest and most mature iGaming states—New Jersey, Pennsylvania, and Michigan—each saw growth of at least 21%, despite being in their twelfth, sixth, and fifth years as legal markets, respectively, Jefferies noted. FanDuel claimed the top spot for iGaming GGR in Q2 for the second consecutive quarter, with its share increasing by four percentage points year-over-year to 24%. BetMGM narrowed the gap with DraftKings, leaving the two brands tied at 21% GGR share. However, DraftKings emerged as the clear second when including contributions from its Golden Nugget brand, with a combined GGR share down 1 percentage point to 24%, just behind FanDuel. Despite holding the highest combined market share for iGaming, FanDuel was the leader in only one of the five commercial iGaming states, though it was the largest, Pennsylvania. This suggests further growth potential, as FanDuel’s Q2 GGR share trails the market leader in Connecticut, New Jersey, and Michigan by 8 percentage points, 2 percentage points, and 0.3 percentage points, respectively.

ADDITIONAL ANALYST COMMENTARY: Goldman Sachs upgraded Entain (GMVHF) to Neutral from Sell with a price target of 710 GBp, down from 775 GBp. The firm says the stock’s valuation has been reset and its Sell thesis has largely played out. Entain has more to do on its turnaround but the valuation reset better reflects the risk/reward, the analyst tells investors in a research note.

Argus downgraded Las Vegas Sands (LVS) to Hold from Buy. The firm sees the company being impacted by the weak consumer spending in China and the renovations to the Londoner in Macau while warning that the weakening in the retail business will weigh on results, the analyst told investors. Argus added that it does not see the shares rallying until sometime in Q2 of 2025 when the results are fully in operation while cutting its FY24 EPS view by 57c to $2.50 and its FY25 view by 66c to $2.80.

BofA upgraded Churchill Downs (CHDN) to Buy from Neutral with a price target of $155, up from $145. The firm sees Churchill Downs’ unique double-digit organic growth profile, upcoming property opening in Northern Virginia and scarcity value as compelling relative to broader Gaming and Consumer stocks amid recent stock volatility and consumer travel fears, the analyst commented. BofA thinks Churchill has a pipeline to deliver double digit EBITDA growth, while Gaming peers struggle to grow organically at all. The firm is “excited” about the potential for the Rose property in Virginia given the densities and low competition in the area.

Truist upped the firm’s price target on Gambling.com to $13 from $12 and reaffirmed a Buy rating on the shares. The company’s Q2 adjusted EBITDA solidly beat consensus estimates driven by NDC – new depositing customers – growth and resiliency in the North American business. the analyst tells investors in a research note. Gambling.com’s 2024 guidance was also raised as the Google search ranking methodology change impact was more modest than expected, the firm added.

JPMorgan bumped the firm’s price target on Flutter Entertainment up to 21,500 GBp from 20,700 GBp and reassessed an Overweight rating on the shares. The analyst updated the company’s model following the Q2 results. The quarter was once again proof of Flutter’s industry leading product across both online sports betting and internet gaming, with a strong momentum across both segments and still meaningful market share opportunity within the latter, the analyst tells investors in a research note.

Argus cut its price target on DraftKings to $40 from $54 but reinforced a Buy rating on the shares. Reflecting the legalization of online sports betting in additional states, the firm expects the company’s revenue to jump to $5.1B in 2024 vs. its prior view of $4.7B while noting that declining customer acquisition costs bode well for long-term growth. Argus is also narrowing its 2024 EPS loss view to (4c) from (10c) and raising its FY25 EPS view to 88c from 80c.

Citi maintained a Buy rating on DraftKings with a $55 price target after the company abandoned its plans to implement a gaming tax surcharge across high-tax states. The firm had initially expressed some skepticism with the initiative, especially if DraftKings was the only company implementing the charge. As such, it views the announcement as a positive development.

Morgan Stanley lowered the firm’s price target on Entain to 1,050 GBp from 1,160 GBp and keeps an Overweight rating on the shares.

Benchmark added Super Group (SGHC) to the firm’s top ideas for 2024, telling investors in a research note that the company’s valuation has been abandoned by the market and is detached from the fundamental growth opportunity that continues to impress. The firm made no change to its Buy rating or $5 price target.

BofA axed its price target on Melco Resorts to $7.50 from $8.50 and kept a Buy rating on the shares. The firm cites the expected drag on Macau GGR from the government’s continued crackdown on illicit currency exchange for the price target decrease. While BofA thinks Melco is making progress in advancing its Macau GGR market share, patients is required to see the impact on GGR from Macau’s proposed new law to criminalize illicit currency exchange, which is expected to go into effect before year-end, the analyst tells investors in a research note.

JMP Securities raised the firm’s price target on Gaming and Leisure Properties (GLPI) to $55 from $53 and reiterated an Outperform rating on the shares. Gaming and Leisure Properties opportunistically raised capital to address near-term funding needs, which the firm anticipates will have a positive impact on bottom-line earnings, the analyst contended.

PUBLICLY TRADED COMPANIES IN THE SPACE INCLUDE: Accel Entertainment (ACEL), Bally’s (BALY), Boyd Gaming (BYD), Caesars (CZR), Churchill Downs (CHDN), DraftKings (DKNG), Flutter Entertainment (FLUT), Gambling.com (GAMB), Gan Limited (GAN), Genius Sports (GENI), Las Vegas Sands (LVS), MGM Resorts (MGM), Penn Entertainment (PENN), Rush Street Interactive (RSI), Super Group (SGHC) and Wynn Resorts (WYNN).