Sports betting stocks seen ‘overreacting’ to NCAA news, federal scrutiny

Several competing stories have pushed shares of online sports betting names into negative territory on Wednesday. For one, the NCAA President Charlie Baker released a statement on efforts to ban player prop bets on college games. In addition, The Wall Street Journal reported that federal lawmakers concerned about gambling addiction are starting to scrutinize online betting companies’ targeting of big spenders and VIPs.

Craig-Hallum believes that while a bad headline for stocks, the potential NCAA ban on player props could be good for industry integrity and sees the impact to betting volume as likely small. Furthermore, the firm views the “overreaction in stocks” as an opportunity.

BAN ON COLLEGE PROP BETS: NCAA president Charlie Baker is calling for a ban on college prop bets in states with legal sports wagering, ESPN reported. Prop bets — short for proposition bets — are wagers not related to the final score of a contest. An example of such a side bet would be an over/under on how many 3-pointers an individual player will make in a game. “Sports betting issues are on the rise across the country with prop bets continuing to threaten the integrity and competition and leading to student athletes and professional athletes getting harassed. The NCAA has been working with states to deal with these threats and many are responding by banning college prop bets,” Baker said in a statement.

His request comes on the heels of ESPN reporting that the NBA is looking into betting irregularities involving Raptors forward Jontay Porter. At issue were two games in which prop bets on Porter were the two biggest winners on prop bets in the NBA on those respective evenings, the publication notes.

FEDERAL SCRUTINY: 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 reports. Sen. 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, Rep. 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 notes.

SELLOFF AN OVERREACTION: Craig-Hallum thinks online sports betting stocks are overreacting on Wednesday in response to NCAA President Charlie Baker releasing a statement on efforts to ban player prop bets on college games. Another Wall Street Journal article on VIP programs being investigated is also a factor in the selloff, the firm adds. Craig-Hallum, 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.

The firm’s Buy ratings in the group are DraftKings, Flutter Entertainment, Genius Sports (GENI) and Sportradar (SRAD).

BETTER POSITION: Jefferies notes that “in a case of unfortunate timing” several U.S. news items surfaced around the time of the firm’s fireside chat with Flutter’s CEO and CFO, including The Wall Street Journal reporting that Senator Richard Blumenthal has sent letters to eight online gambling operators urging them to stop using player data to target problem gambling customers; the NCAA president reportedly calling for a ban on college prop bets across all states; and New Jersey potentially increasing its betting tax rate to 30% from 15%.

The firm believes argues that Flutter “sits in a relatively better position to address the topics of increased tax, VIP scheme scrutiny, and a potential ban on college betting.” Jefferies has a Buy rating and 19,500 GBp price target on the shares.

PRICE ACTION: In afternoon trading, shares of DraftKings have dropped almost 7% to $45.37, while Flutter’s stock has slipped about 6% to $201.30.