Bet On It: Supreme Court allows Florida to offer sports betting, no timeline set

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: BetMGM (MGM) announced the renewal of its strategic partnership agreement with the Philadelphia 76ers. Under the agreement, BetMGM will continue as an Official Sports Betting Partner of the team. The multi-year extension includes the addition of BetMGM VIP fan experiences and watch parties, in-market odds boosts, and increased courtside signage at Wells Fargo Center. Throughout the 2023-2024 regular season, BetMGM will curate VIP fan amenities including courtside access to pre-game shootarounds and luxury seating for games. BetMGM customers in Pennsylvania and New Jersey will exclusively have access to a 50% live odds boost token during 76ers games.

Bragg Gaming (BRAG) announced the expansion of its content distribution network in Italy with Lottomatica Group, “the leading online casino operator in Europe’s second largest regulated online casino market. The new content distribution agreement will bring Bragg’s Italian casino content portfolio, including localized versions of proprietary games such as Fairy Dust by Atomic Slot Lab and Sea of Plenty by Indigo Magic, as well as multiple locally-certified titles from the company’s exclusive Powered by Bragg casino games collection, to a large new Italian audience for the first time. Lottomatica is Italy’s leading online casino operator with a reported 21% market share. H2 Gambling Capital estimates online casino revenues in Italy will grow 15% this year compared to 2022 to $2.7B .

SCOTUS WEIGHS IN ON FLORIDA SPORTS BETTING: The Supreme Court declined an emergency request on Wednesday to halt a multi-billion-dollar deal between Florida and the Seminole Tribe, allowing the state to offer online sports betting, Ariane de Vogue of CNN reported. This decision suggests that sports betting may become accessible in Florida, although the precise timing could be affected by ongoing legal challenges in state courts. The agreement, often referred to as a “compact,” received support from Florida’s Governor, Ron DeSantis. It was also endorsed by the U.S. Department of the Interior and is expected to generate $2.5B in new revenue over the next five years, with a projected total of $6B by the year 2030. Justice Brett Kavanaugh issued a separate statement in which he expressed his respect for the Supreme Court’s decision but raised questions about whether the agreement might raise separate legal issues under state law. He emphasized that the concerns related to state law were not the central focus of the current application brought by other gambling companies. The court’s concise ruling has the potential to encourage other states and tribal entities to explore and pursue similar agreements and deals in the realm of online sports betting.

SEPTEMBER TRENDS: In September, digital gross gaming revenue, or GGR, is on pace to reach $1.53B, marking a 28% increase compared to the same period last year, according to BofA. This growth rate has picked up from the 24% seen in August. The firm anticipates that the digital GGR for the third quarter in the United States will show a 30% year-over-year increase, a slight deceleration from the 45% growth observed in the second quarter. Online sports betting, or OSB, GGR in September has grown by 27% year-on-year, and BofA projects a 33% growth for the third quarter compared to the 65% growth in the second quarter. iGaming GGR experienced an acceleration, with a 31% increase in September compared to 24% in August. For the third quarter, it’s up by 26%, slightly outpacing the firm’s previous estimate of 25%. The firm made a minor adjustment to its net revenue estimate for DraftKings (DKNG) in the third quarter, raising it to $761M from $756M to account for recent iGaming trends in Michigan. The year-over-year growth in OSB handle, which represents the volume of bets, has surged by 51%, showing a faster increase compared to the 41% growth observed in August. Year-to-date for the third quarter, it’s up by 44%, surpassing the 26% growth seen in the second quarter. This surge in demand at the beginning of the football season is promising, and in New York, we’ve noticed a slight increase in the average weekly handle for October in comparison to September. In September, the OSB hold rate improved to 9.8% from 9.6% in August, but it’s down by 180 basis points year-on-year as we compare it to the high 11.3% hold rate in 2022. BofA projects the hold rate for the third quarter to be 9.9%, showing a decline from the 10.3% seen in the second quarter and the 10.9% recorded in the third quarter of 2022. BofA told invstors in a research note that the cross-sell from OSB to iGaming is resonating with consumers, reflected through iGaming growth accelerating to up 31% in the first month of football vs. a run rate of low 20%s prior, and the leaders in OSB, DraftKings and FanDuel (PDYPY), both gaining iCasino share in September.

FOOTBALL: Macquarie noted that, based on its proprietary hold model, the firm calculated football market hold of 17% for the week of October 16-22, well above its long-term average hold target of 9%. The firm highlighted:

• 62% of NFL games resulted in scores falling below the projected total
•  there was one noteworthy upset involving the Patriots
• the primetime games represented 40% of all bets on NFL games
• for single-game College holds, the spread bets had a 5% hold, money line bets had a 10% hold, and Over/Under bets had a 2% hold

Macquarie’s model estimates sports betting market hold of 14% for the week of October 16-22, assuming a football hold of 17% and hold of 9% for all other sports. The firm expects that the market’s hold rate in the third quarter will be approximately 9.5%, which is slightly higher than its recently established standard hold target of 9%. Nevertheless, Macquarie still foresees the hold rate will present a challenge for most operators, resulting in around a 100-basis point headwind, with the exception of Rush Street Interactive (RSI), where we believe hold will be a roughly 100-basis point advantage, as depicted in Figure 3. Overall, the firm contends that the fourth quarter will hold greater potential for the sector, as it expects to see record profits, making any potential market dip an attractive buying opportunity.

Separately, Canaccord said that during the sixth week of the NFL season in New York, the total amount of bets placed across the entire industry grew by 25% year-over-year, reaching $403M. Moreover, the gross gaming revenue saw a spike of 67% compared to the previous year, reaching a new weekly record of $62M. This growth was primarily attributed to highly favorable game results, which resulted in a weekly hold rate of 15.4%. More specifically, the firm noted that DraftKings and FanDuel have established leadership positions in 2023 due to their superior product offerings. They have introduced new parlay features and enhanced personalization, setting them apart from the competition, according to the firm. Their increasing scale allows them to invest more in promotions and retention marketing compared to their rivals. Fanatics is well-positioned to compete in the US market, despite entering later, Canaccord contended. Their financial position, leadership team, and a product provide a foundation. Like DraftKings and FanDuel, Fanatics plans to efficiently acquire users by leveraging its database of over 100M sports fans. They have also accelerated their market access and product development capabilities through the acquisition of PointsBet’s US assets. Penn Entertainment (PENN) has plans to launch the ESPN Bet platform in mid-November. While significant investments in marketing and user acquisition, along with an improved product offering, should help Penn gain market share, the level of support from Disney at the corporate level and the involvement of ESPN’s on-air personalities will be crucial determinants of success, the firm told investors.

EARNINGS RECAP: Churchill Downs (CHDN) reported third quarter earnings per share fell flat of expectations, but revenue came out ahead of consensus in the quarter. The company delivered record Q3 revenue and adjusted EBITDA across its Live and Historical Racing and Gaming segments and record Q3 adjusted EBITDA in its TwinSpires segment: The company said, “For the third quarter of 2023, revenue increased $123.1 million driven by an $89.0 million increase attributable to the Virginia properties acquired in the P2E Transaction, a $14.7 million increase attributable to the properties acquired in the Ellis Park and Chasers Transactions, an $8.8 million increase primarily due to the opening of Turfway Park in Northern Kentucky in September 2022, a $7.4 million increase from our Derby City Gaming property in Louisville, and a $4.3M increase from our Oak Grove property in Southwestern Kentucky. These increases were partially offset by a $1.1M decrease at Churchill Downs Racetrack due to the decision to move July race days as part of the Churchill Downs Racetrack Spring Meet to Ellis Park. Adjusted EBITDA increased $46.4 million driven by a $38.3 million increase attributable to the Virginia properties acquired in the P2E Transaction and a portion of the benefit from the Exacta Transaction, a $7.3 million increase from continued growth at our Derby City Gaming property in Louisville and our Oak Grove property in Southwestern Kentucky, and a $2.9M increase attributable to our other Live and Historical Racing properties. These increases were partially offset by a $2.1 million decrease at Churchill Downs Racetrack primarily due to the decision to move July race days as part of the Churchill Downs Racetrack Spring Meet to Ellis Park.” Truist lowered the firm’s price target on Churchill Downs to $140 from $148 after its Q3 earnings miss but kept a Buy rating on the shares. There are multiple growth drivers offsetting any near-term industry macro concerns, but the firm is adjusting estimates by 4%-5% on timing and ramp of new builds, along with some transitory macro and competitive pressures, the analyst told investors in a research note.

Similarly, Boyd Gaming (BYD) reported similar mixed results in the third quarter. President and chief executive officer of Boyd Gaming, said: “Our third-quarter results reflect the value of our diversified business model. Continued strength in play from our core customers, strong results from Sky River and online gaming, and growth in our non-gaming business all contributed to a solid performance in the quarter. However, quarterly results were impacted by declines in play from our retail customers and ongoing cost pressures, both related to the challenging economic environment.” BofA lowered its price target on Boyd to $70 from $77 and maintained a Buy rating on the shares. Following the company’s Q3 report, the firm lowered its 2024 EBITDAR estimate by 5% to reflect higher operating costs and supply headwinds from Red Rock Resorts’ (RRR) Durango. However, the firm reiterated its Buy rating, citing Boyd’s lower financial and operating leverage and relative value.

ADDITIONAL ANALYST COMMENTARY: MoffettNathanson upgraded DraftKings to Outperform from Market Perform with a price target of $37, up from $31. The stock in morning trading is up 5% to $29.57. The analyst expects the momentum in both sides of the company’s business to continue. This should drive “sustained, robust” sales growth while DraftKings remains focused on strategically reining in expense growth, the analyst tells investors in a research note. When taken together, this puts DraftKings on the “cusp of a meaningful inflection in profitability,” says MoffettNathanson. The firm expects DraftKings will reach GAAP EBITDA profitability in 2025 after achieving a full year of adjusted EBITDA profitability in 2024.

Citi kept a Buy rating on DraftKings with a $41 price target following a transition of coverage. The firm sees scope for DraftKings to raise its long-term adjusted EBITDA target at its upcoming investor day on November 14 and believes this upside may not be fully reflected in the shares. As such, Citi would be buyers of DraftKings heading into the event and opened a “30-day positive catalyst watch.”

BTIG lowered the firm’s price target on DraftKings to $38 from $39 and backed a Buy rating on the shares ahead of its Q3 results and initial FY24 guidance. The analyst notes that there is some potential for choppiness in shares over the next few months due to expectations and upticks in competitive noise, but the multi-year growth and margin improvement story for DraftKings remains compelling. Thgere is potential for DraftKings to speak to narrower EBITDA losses for FY23, while the mid-month Investor Day could shine a light on the impacts to free cash flow and the balance sheet from forthcoming margin improvement, the firm tells investors in a research note.

Stifel lowered the firm’s price target on Boyd Gaming to $78 from $83 and reaffirmed a Buy rating on the shares. While saying that Boyd’s Q3 report “will probably cause near-term pressure not only for BYD shares, but probably for other regional gaming operators,” the firm believes “this could actually be a clearing event” as estimates should move lower and expectations “will finally get reset.” The firm has moved its own estimates down to embed not only a slightly softer top-line environment but also higher operating expenses moving forward, but still believes Boyd’s strong free cash flow “remains significantly undervalued,” the analyst tells investors.

Morgan Stanley analyst Stephen Grambling lowered the firm’s price target on Boyd Gaming to $67 from $72 and held an Equal Weight rating on the shares. The firm has cut its FY24 and FY25 EBITDAR estimates by about 3% to reflect softer top-line trends in all of Boyd’s core segments along with upward cost pressures, the analyst tells investors in a post-earnings note.

HSBC initiated coverage of Wynn Resorts and MGM Resorts (MGM) with a Buy rating and $111 and $49 price target respectively. The pandemic accelerated shifts in lifestyle, technology, and behaviors that are shaping travel and leisure and fueling growth, the analyst told investors in a research note. The firm says innovation and digital commerce are driving “operating model convergence and a broadening of the competitive landscape.” It initiated 13 names in U.S. travel and leisure sector, favoring names “that leverage scale and a differentiated brand to drive sustainable cash generation.”

Jefferies lowered the firm’s price target on Entain to 1,285 GBp from 1,460 GBp and kept a Buy rating on the shares. With Entain shares down -14% in the last month, the firm sees its 10% EBITDA downgrade for FY24 as priced in. Entain’s action plan on 2 November could provide a catalyst by outlining credible medium-term growth and margins. The ex-JV valuation at 6-times EV/EBITDA is low versus history. Expectations of an MGM approach waned during the cyberattack, but the deal rationale remains, in Jefferies’ view.

JPMorgan lowered the firm’s price target on MGM Resorts to $61 from $63 and doubled down on an Overweight rating on the shares. The analyst reduced Q3 U.S. land-based casino EBITDAR by $100M, taking into account the impact of last month’s cyber security attack by hackers. The firm also lowered its Q4 U.S. EBITDAR to account for a “small but lingering impact” related to the cyber attack. MGM shares are off almost 30% since it reported Q2 earnings in early August and investor sentiment towards “is extremely negative,” the analyst tells investors in a research note. It sees the shares as offering “contrarian investors tremendous value.”

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 (PDYPY), 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).