Bet On It: Operators under fire for marketing tactics and college player props

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 RECAP: Nevada reported February statewide gaming win was up 8.5% to $1.34B. The state reported February Las Vegas Strip gaming win was up 12.4% to $800.75M versus last year.

Sportradar (SRAD) and Oddin.gg announced they have entered into a multi-year strategic partnership to offer audiovisual streaming of Oddin’s exclusive esports content to Sportradar’s betting operator clients around the world. The deal will support Oddin.gg’s growth ambitions in the expanding global Esports market, whose betting turnover was estimated to be EUR 83B in 2023. It will extend the reach of Oddin.gg’s official competition content by leveraging Sportradar’s market leading position as an AV betting provider. Sportradar’s global network of 900+ betting operator clients will benefit from the opportunity to offer greater volume and a wider variety of live streamed esports events to their customers, increasing opportunities for engagement with existing and new betting markets. The partnership also paves the way for future collaboration in other areas. Oddin.gg holds the official rights to high-profile competitions including the newly released Counter Strike 2 which Sportradar will distribute to sportsbooks through the company’s integrated streaming product, providing access to prominent competitions globally and enabling operators to offer new content to their customers.

The board of directors of Bragg Gaming (BRAG) confirmed that it has formed an ad hoc special committee, chaired by independent board member Don Robertson, to undertake a review of the company’s strategic alternatives. The special committee has been appointed to consider and explore strategic alternatives, which may include the sale of the company or of its assets, a merger, financing, further acquisitions, or other strategic alternatives. No timetable to complete the strategic review process has been established, nor have any decisions been made relating to strategic alternatives at this time. There can be no assurances that any transaction will be completed.

UNDER A MICROSCOPE: Federal lawmakers concerned about gambling addiction are starting to scrutinize online betting companies’ targeting of big spenders and VIPs., The Wall Street Journal’s Katherine Sayre reported. Senator Richard Blumenthal sent letters last week to eight online gambling companies, including FanDuel (FLUT) and DraftKings (DKNG), urging them to stop using player data and other marketing tactics to target customers with gambling problems. Meanwhile, Representative Paul Tonko said he is working on legislation that would impose federal oversight of online sports betting in any state that has legalized the business, the author noted. Separately, Adrian Wojnarowski, ESPN’s senior NBA Insider, tweeted: “NCAA president Charlie Baker says organization is working to ban prop bets on college athletes across betting markets. Baker says NCAA is contacting officials in states still allowing prop bets on college sports and asking them to join with several states that have banned them.” BofA analyst Shaun Kelley noted that shares of online gaming stocks fell by about 6% yesterday following headlines on college player prop bets and potential Federal oversight of problem gaming as well as a proposal for higher online taxes in New Jersey. While the college prop ban suggested by the head of the NCAA “gathered much attention from investors,” the firm believes higher online tax rates pose a larger threat to the nascent industry, the analyst tells investors. However, while headlines may persist, the firm thinks the underlying impact of a college prop ban is “de minimus” for DraftKings and a change in tax rates would take both legislative action and time to implement. The firm maintains a Buy rating and $54 price target on DraftKings shares. MoffettNathanson raised the firm’s price target on DraftKings to $55 from $52 and reiterated a Buy rating on the shares. The firm attributes a selloff in shares yesterday to three online gaming topics that were separately reported: federal scrutiny over VIP program, a potential NCAA player prop ban and regulators exploring raising New Jersey online gaming tax rates. However, while acknowledging these risks, the analyst notes that the firm hd the opportunity to meet with DraftKings’ CFO Jason Park and says that the firm expects DraftKings and FanDuel to retain or even grow market share going forward. JPMorgan kept an Overweight rating and $55 price target on DraftKings, saying investors should buy the 7% dip in the stock. Craig-Hallum said online sports betting stocks are overreacting. The firm, which agrees a college prop ban should happen to protect student-athletes and increase the integrity around sports and betting, believes a low-single-digit percentage of bets is at risk with a majority of those dollars likely redirected to game outcomes if a ban is universally enacted across states. It sees buying opportunities on the pullbacks, noting about half of states are already banning college player props.

EARNINGS RECAP: Bragg Gaming reported fourth quarter earnings on Tuesday falling just shy of last years figures in terms of revenue and adjusted EBITDA. CEO Matev Mazij commented: “Through Bragg’s strategic efforts to establish the business as a premier content-focused iGaming B2B provider and our meticulous control over expenses, we achieved growth in revenue, gross profit, and Adjusted EBITDA in 2023, along with a 210bps improvement in Adjusted EBITDA margin to 16.3%. 2023 revenue rose 10.4% to EUR 93.5M, or $100.5M, gross profit increased by 10.8% to EUR49.9M or $53.7M, and adjusted EBITDA increased by more than 26% to EUR15.2M or $16.3M. These achievements are attributed, in part, to a reconfiguration of our revenue mix, favoring higher-margin products like internally developed proprietary content, and our comprehensive Player Account Management platform, all while maintaining stringent cost control measures…Last year, we successfully launched a total of 29 new proprietary online titles worldwide, including 26 proprietary titles newly introduced to the European online casino markets and 15 proprietary titles newly introduced to the North American online casino markets. We expect to maintain or exceed this pace of game releases this year. By continuously expanding our portfolio of higher-margin proprietary and exclusive third-party games to a wider range of new partners at an accelerated pace, we are well positioned for long term growth in top-line revenue, gross profit, and Adjusted EBITDA, along with improved operating margins…With confidence, we affirm our readiness with the appropriate strategies, financial strength, and infrastructure to maintain our business momentum while executing initiatives that foster cash flow growth and generate added value for our shareholders.”

ADDITIONAL ANALYST COMMENTARY: Jefferies raised the firm’s price target on Sportradar to $13 from $10 and backed a Hold rating on the shares after the company’s quarterly results “slightly beat” the Street’s view and management provided “solid” revenue and EBITDA guidance for 2024. The quarter demonstrates the company’s “execution potential,” but meeting/beating expectations “should be pivotal going forward for the shares as uncertainties could solidify,” the analyst told investors.

Berenberg lowered the firm’s price target on Entain (GMVHF) to 1,140 GBp from 1,310 GBp and backed a Buy rating on the shares.

Susquehanna increased the firm’s price target on DraftKings to $54 from $51. The firm said based on quarter-to-date state data their Q1 revenue and EBITDA estimates look conservative and they believe the long-term EBITDA margin profile appears incrementally de-risked and creates potential upside.

Mizuho initiated coverage of Boyd Gaming (BYD) with a Buy rating and $80 price target. Boyd has “underappreciated,” high return on investment projects that should drive upside to estimates, while its 5% stake in FanDuel is “not reflected” in the current valuation of the operator of 28 regional assets in the Las Vegas Locals market as well as Midwest/South, according tot he analyst.

The firm initiated coverage of Las Vegas Sands (LVS) with a Buy rating and $70 price target. Strategic investments in Macau and Singapore are not fully reflected in Street estimates, which should drive the return on capital story for the developer and operator of integrated resorts in Macao and Singapore with “outsized exposure to mass market gaming,” the analyst tells investors.

Mizuho initiated coverage of MGM Resorts (MGM) with a Buy rating and $61 price target. MGM is one of the largest global gaming and entertainment companies, with a large domestic presence, as well as international exposure and an online gaming operation, notes the analyst, who believes the domestic opco structure is “materially undervalued” given several moving parts. MGM has the opportunity to generate significant free cash flow and buy back shares, the firm told investors.

Mizuho initiated coverage of Penn Entertainment (PENN)with a Buy rating and $29 price target. The firm thinks the Penn operating company land based operations are “undervalued” and sees “call option upside” from the ESPN online sports betting and iGaming partnership. However, entering legacy, mature states will be “difficult to gain and maintain market share,” the analyst contends.

The firm initiated coverage of Churchill Downs with a Buy rating and $142 price target. The owner/operator of traditional regional casinos and racetracks, best known as the owner of the iconic Kentucky Derby horse racing facility, has a number of high return on investment projects that the firm feels are not reflected in Street estimates, the analyst tells investors. In addition, Churchill has a strong free cash flow profile that should inflect higher as EBITDA from growth projects come online, the firm noted.

Mizuho initiated coverage of DraftKings with a Buy rating and $58 price target. DraftKings is the “leading online sports betting and iGaming company in North America” with a 30%-plus market share, notes the firm, which believes the Street “underestimates the magnitude of the operating leverage in the business.” Given declining external marketing and reduced promotional expense, DraftKings is “turning into a compelling” free cash flow generator, the analyst added.

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).