PDYPY - March Madness is here - time to buy or fade sports betting stocks?

2023-03-11 11:04:42 ET

The NCAA basketball tournament will begin on March 14 with a record number of Americans forecast to place legal sports bets with new states in the mix. The latest state to legalize online sports betting was Massachusetts with apps now live for BetMGM ( MGM ), Caesars Sportsbook ( CZR ), DraftKings ( NASDAQ: DKNG ), FanDuel (PDYPPY), Penn Interactive ( PENN ), and WynnBet ( WYNN ) just in time for the three-week rush of tournament games. DraftKings ( DKNG ) is based in Boston and has held special events in the state to commemorate the development.

While the NCAA March Madness tournament is one of the marquee sports betting events of the year, along with the Super Bowl and Kentucky Derby, the hype for sports betting stocks has not been followed by share price rallies in recent years. Roth MKM Edward Engel warned in a recent note to investors that the March Madness could be a potential trade to fade this year. "As U.S. iGaming approaches its slowest months of the year, we see more negative catalysts than positive ones in the coming months. OSB-focused stocks like DraftKings ( DKNG ) have historically traded flat or down in the months following March Madness, where OSB wagers from April to Aug contributed just 31% of 2022's total," he noted. DraftKings ( DKNG ) trailed the performance of the S&P 500 Index in March of 2020-2022 as investors bid up the stock ahead of the tournament before selling into the seasonally slower months of April to August. Analysts have also pointed to the lower level of promotional activity that could pressure some of the high-flying expectations for the overall March Madness betting handle.

Outside of the traditional sports betting sector, there are some sleeper stocks that could benefit from a strong March Madness sports betting handle. Genius Sports ( GENI ) and Sportradar ( SRAD ) both head into the March Madness period with shares spinning lower even though sports data providers also benefit from the larger U.S. betting market. Genius Sports execs talked about the upside from the NCAA tournament and other key events during the company's recent earnings call ( read the transcript ).

What about Vegas? March Madness is still expected to be a major draw for Strip casinos this year even with the economy unsettled. Macquarie analyst Chad Benyon is bullish on even further Vegas growth due to the strong return of conventions and a strong sports/event calendar over the next couple of years that includes hosting NCAA men’s Division I basketball tournament games, Formula 1 racing, Las Vegas Raiders, Golden Knights games, the 2024 Super Bowl and more live events than ever. Strip GGR and non-gaming revenue are expected to be resilient for Strip operators like MGM Resorts ( MGM ) and Caesars Entertainment ( CZR ).

Looking ahead, some of the potential catalysts to watch for in the sports betting sector include the launch of online sports betting by Fanatics ( FANA ) and potential M&A for Entain Plc ( OTCPK:GMVHF ), FanDuel owner Flutter Entertainment ( OTCPK:PDYPY ) and 888 Holdings ( OTCPK:EIHDF ) after the UK Gambling Commission's publishes its whitepaper. The UK gambling regulator could publish the white paper by late March to help provide more clarity on valuation and attract M&A interest. Of note, Entain ( OTCPK:GMVHF ) has attracted bids from MGM Resorts ( MGM ) and DraftKings ( DKNG ) in the past. Some reports suggest Caesars Entertainment ( CZR ) could acquire FanDuel for a hefty premium or possible purchase the entire gaming company. 888 Holdings ( OTCPK:EIHDF ) could also be a takeover candidate as its price has been held down by the pending whitepaper and its former CEO left in late January amid an alleged money laundering scandal. On the negative side of the ledger, the legislative calendar could include some surprises with the new states looking to legalizing OSB/iGaming seeing setbacks and an aggressive push by Fanatics to nab market share.

As for numbers, U.S. online gross gaming revenue was +49% year-over-year in January, but just +16% when excluding the new states (Ohio, Maryland, Kansas, and Louisiana) that launched in the past 12-months. Total online sports betting GGR was +70% Y/Y and iGaming GGR was +20%. Morgan Stanley recently lowered its 2023 US online GGR estimate to $16.1B from $16.2B due largely to lower sports betting handle estimates in some more mature states (IA, IN, MI) offset by stronger iGaming revenue estimates. The general takeaway is that online sports betting and iGaming numbers in 2023 are tracking close to expectations and profitability initiatives are slowly helping the bottom lines.

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