With March Madness right around the corner, now’s a great time to explore companies poised to benefit from longer-term secular entertainment and gambling trends. Sports betting stocks are at the top of that list.
If you’re a fan of college basketball there’s nothing that matches the excitement of March Madness. Chances are, even if you’re not a fan you’ve probably participated in a handful of office pools or the occasional bracket challenge, where your best picks inevitably lose to someone that picks games based on mascots or team colors. Don’t feel too bad if your Final Four pick is out in the first round though; bracket picks are tough, so tough that Warren Buffett once underwrote a $1 Billion contest for Quicken Loans, which would have paid out a billion dollars for a perfect bracket. (Given the 1-in-9.2 quintillion odds, it’s unlikely that Mr. Buffett lost any sleep on that).
More importantly, though, March Madness is a phenomenal example of secular trends in wagering and sports media, which are seeing media providers increasingly offer betting directly on their platforms.
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Sports Betting Stock #1: fuboTV (FUBO)
FuboTV Inc. (FUBO) has been incredibly volatile since its IPO in October of last year, trading from 10 to an all-time high just over 62 before being cut in half due to a combination of a decline in growth stocks, growing competition, and an earnings miss (although it’s still up roughly 13% YTD). FUBO was previously covered as a “Stock to Watch” in Mike Cintolo’s Cabot Growth Investor advisory. At the time, Mike had this to say:
“It’s the leading sports-first cable TV replacement, with over 110 channels that feature thousands of live sporting events. But it’s beyond just having content, as Fubo is the only provider that streams live sports in 4k (highest quality), and its Multiview feature allows certain users to watch up to four games at once (split screen). Both industry tailwinds (more people leaving traditional cable) and the company’s offering have led to rapid growth—Q3 revenue was up 71% thanks mostly to a 58% gain in subscribers (to 455,000) and a 150%-plus gain in advertising revenue. Management sees those growth trends continuing (paid subscribers to be north of 500,000 by year-end), and longer-term, TV-related growth alone should be enough to keep big investors interested (revenues expected to rise 78% in 2021). But there’s also another angle here, with Fubo being in the early stages of jumping into the online sports betting market, which makes sense as many of its subscribers would be interested in having a few bucks on a few of the games they’re watching. The top brass thinks eventually sports betting could be as big as its advertising business (currently 12% of revenues and rising), but we’ll have to see how it goes.”
The share price is currently depressed, and the stock is trading below its 50-day line, but the potential for growth in streaming and further sports wagering legalization warrants keeping an eye on FUBO.
Sports Betting Stock #2: DraftKings (DKNG)
DraftKings Inc. (DKNG), which is broadly seen as the progenitor of daily fantasy sports, has also become a prolific sportsbook operator as the nationwide trend seems to be towards a more permissive attitude about sports wagering. In fact, New York is currently considering legislation to allow mobile sports betting because New Yorkers can already travel to Pennsylvania and New Jersey to place those wagers. One significant theme that appears to be at least partially responsible for an increase in legalization (20 states with pending or possible approval in the next few years, in addition to states where it’s already legal) seems to be state budget deficits due to the Covid-19 pandemic.
DraftKings, which began trading in April of last year via a merger with a Special Purpose Acquisition Company (SPAC), is up more than 250% since the merger and more than 35% YTD. Just last week the company announced an app integration agreement with DISH Network (DISH) that would allow Dish customers to wager through DraftKings on their DISH TV Hopper platform as well as other DISH services, which appears to have triggered some bullish order flows identified by Jacob Mintz in Cabot Options Trader.
Per DISH TV Group President Brian Neylon, “We’re thrilled to work with DraftKings to amplify the sports-fan experience, and extend the DraftKings footprint across our unique suite of services, including SLING TV and Boost Mobile, with potential applications across our 5G wireless buildout in the future.”
One potential limiting factor is that the agreement requires DISH Hopper owners to be independently connected to the Internet, potentially excluding customers that have Hopper TV due to the lack of reliable high-speed Internet in their areas. The proliferation of 5G could certainly address this, although one wonders how quickly cord-cutting will come for satellite TV viewers once streaming is available to them as well.
Sports Betting Stock #3: Penn National Gaming (PENN)
Penn National Gaming (PENN), which is up 1,300% since its pandemic lows (and better than 190% since its pre-pandemic high), is broadly regarded as a traditional brick-and-mortar casino operator. At least it was, until acquiring 36% of Barstool Sports in January of 2020. What was overlooked at the time of the deal was the degree of fandom for Barstool Sports as an entity. Unlike a traditional broadcaster or digital media company, where the sporting event is the product, Barstool Sports boasts tens of millions of dedicated fans that are actively engaged with the brand on social media and consume content for content’s sake.
This degree of engagement is expected to boost perception of Penn’s brick-and-mortar locations for Barstool fans, but more importantly, it immediately provides a pool of potential mobile bettors that, per Goldman Sachs, dwarfs that of DraftKings.
Not only did Penn acquire a large pool of highly engaged sports fans; they acquired fans that bet. Per Penn’s Investor Relations, 62% of Barstool fans wager on sports with 44% doing so at least once a week. Time will tell whether the acquisition adds to the bottom line as quickly as the market hopes (and appears to be pricing in), but Penn and Barstool plan to launch in 10 states (every state where online wagering is currently legal) this year, with possible expansion in the event more states take steps to legalize it.
All three of these competitors are taking aim at a hybrid media-wagering industry that’s still in its infancy. But unlike March Madness, where Cinderella goes home at midnight and there can be only one champion, there’s room for more than one winner here, as the mobile wagering market is projected to grow to $20 billion + in the years to come.
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