A Look At The Type Of Margins Sports Gambling Investors Can Expect From The Business

One investing thesis that has performed very well in 2020 has been U.S. online and sports gambling. On Tuesday, Bank of America analyst Shaun Kelley took a close look at the type of margins sports gambling investors can expect from the business in the long-term.

The Numbers: At this point, early market movers are reporting large losses as they fight for initial market share on a state-by-state basis. However, Kelley believes these businesses will eventually be able to achieve 30% EBITDA margins at scale.

“Between sports and iGaming, we expect iGaming will be the higher-margin business owing to lower platform, content and ongoing promotional costs but current gaps should narrow as marketing spend for sports betting rationalizes,” Kelley wrote in a note.

Kelley said DraftKings Inc DKNG, FanDuel and MGM Resorts International MGM have each already spent more than $100 million in 2020 on sports betting and iGaming marketing.

At the same time, Penn National Gaming, Inc PENN and its Barstool app have achieved 15% market share in Pennsylvania with virtually zero external marketing spend, but Kelley said that's only one state in a very short period of time.

Finally, Kelley said Caesars Entertainment Inc CZR could choose to take a more conservative, “profit first” approach to its marketing efforts.

Related Link: Fox Is An Under-The-Radar Play On US Sports Gambling

How To Play It: Bank of America has the following ratings and price targets for the sports betting and iGaming stocks mentioned:

• Penn National: Buy rating, $85 target.
• DraftKings: Neutral rating, $55 target.
• Caesars: Neutral rating, $65 target.
• MGM: Underperform rating, $15 target.

Benzinga’s Take: There’s no question U.S. iGaming and sports betting will be a huge market as it expands throughout the country on a state-by-state basis. However, stocks like Penn and DraftKings have already priced in a significant amount of growth after gaining 159% and 300% year-to-date, respectively.