US Sports Betting Field Trip

Blog

Morgan Stanley released a research report March 29 stating US Sports Betting is a sector to watch. Morgan Stanley visited Atlantic City, attended investor days, and hosted meetings related to sports betting. They met with a range of companies including Borgata (MGM), CZR (Caesars), DraftKings, FanDuel, Ocean Resort, Resorts/Mohegan Sun, Tropicana/ERI (Eldorado Resorts), and TSG (The Stars Group). Their six key takeaways were:

1. More states likely to legalize sports betting soon.

Year-to-date DC has legalized. IN, IA, NH, MI, MA, NY and IL have potential to legalize this year. AR, CT, KS and OH are possibilities. Morgan Stanley sees NY as a significant long-term opportunity (worth >10% of the total US sports betting market). The NY state budget could include onground licenses for the four upstate casinos this year.

2. Morgan Stanley believes US sports betting should be more online than onground.

Morgan Stanley expects $5B of revenue in 2025 with a heavily weighted online component. NJ sports betting handle was 80% online in February, already significantly higher than the UK (~50%). Morgan Stanley considers the US market size will be driven by online availability.

3. March Madness driving a strong month for NJ.

Both online and onground sports book operators were upbeat about current betting traffic/volumes, and the broader benefits to their properties. While AC occupancy is generally high on Fridays, sports books were packed on Wednesday/Thursday last week (3/21-3/22). Casino operators also highlighted a jump in food & beverage and table revenues.

4. The Atlantic City onground market remains competitive.

Morgan Stanley believes the new properties in the market (Hard Rock and Ocean) have recently adjusted strategies to focus more on core gaming customers. Hard Rock continues to spend aggressively on entertainment, but is also shifting its focus to target more traditional gaming customers. Ocean Resort is focusing on advertising its casino more and activating its legacy database (which was built with Revel’s “Gamblers Wanted” campaign). This could shift the impact in the market from the luxury properties to the core properties. Morgan Stanley heard MGM (Borgata) has been marketing at a more steady state level in recent months, while CZR (Caesars) has been disciplined at its three properties, which may be dampening reported GGR numbers but helping EBITDA.

5. The Stars Group (TSG, not covered) investor day left positives and concerns for the industry.

TSG’s 8-12% 3-5 year annual revenue growth guidance highlights the attractive structural growth story online gambling companies can benefit from. In addition, strong poker businesses create attractive moats and generate significant FCF (free cash flow). On the other hand, TSG’s guidance that margins would remain flat (on what should be a scalable technology business model) highlights the duty and investment headwinds that lie ahead. Management downplayed the regulatory risks Morgan Stanley are most wary of (Australia increasing its consumption tax rates to 15% across all states, the UK implementing online stake limits), while baking in headwinds from other higher duties and the need for increased marketing intensity.

6. Daily Fantasy Sports companies’ early success in NJ is impressive, and makes Morgan Stanley more bullish on them. The key question remains how enduring their first mover advantage will be.

Morgan Stanley found FanDuel’s early KPIs (Key Performance Indicators) to be very impressive: customers are twice as sticky as those in PPB’s (Paddy Power Betfair) other markets, with 12-month (contribution) paybacks on initial cohorts already delivering positive net contribution (revenue payback in 6 months). This suggests FanDuel and DraftKings may have already acquired the most valuable customers. The cross sell opportunity also seems very promising with more to go in casino. Multiple operators (including onground, online, and media companies) spoke to the general stickiness of betting customers. Sign-up friction may lead to lower number of accounts per bettor than in Europe.