A less than stellar year has been endured by the majority of US-based gaming companies, with an array of stocks related to casino and sportsbook operators displaying a marked decline. The only exception appears to be DraftKings, whose performance, while superior, is still underperforming relative to the broader market. Astonishingly, this all comes to pass while the S&P 500 is riding a high of almost 17%.
What could be behind such a lackluster performance? Morningstar senior equity analyst, Dan Wasiolek, points to a number of culprits: an upsurge in competition in the US sports and iGaming market, regulatory changes harbouring an element of uncertainty, and a deceleration in the growth trajectory of brick-and-mortar casinos seen following their impressive recovery in the 2021-23 period.
Yet, in these troubled waters, Wasiolek insists a silver lining can be gleaned, identifying some emerging value among the six domestic gaming stocks surveilled by the research firm. Notably, Wasiolek sees potential in DraftKings and Penn Entertainment, despite the former frequently being tagged as overpriced and the latter falling approximately 19% in a 12-month period; both are considered attractively valued.
Indeed, even with the aforementioned challenges present, Wasiolek predicts an optimistic outlook for the future of online sports betting and iGaming for the likes of DraftKings, Penn, and several of their competitors. This prediction is fueled by a surge of new user acquisition, fans shelling out larger sums on their favored activities, and an increasing number of states legalizing sports betting and iGaming.
Wasiolek’s forecast goes as far as predicting substantial sales growth with revenue increases of 19% in 2024, 24% in 2025, a slight dip to 13% in 2026, and an astonishing 27% leap in 2027.
This outlook is rooted in data: over the past six quarters, US commercial gaming revenue has quadrupled the rate of GDP growth in the country, averaging at a 9.3% increase.
The picture starts to look even rosier with the potential expansion of gambling legislation. Some form of sports wagering is currently sanctioned in 38 states and Washington, DC; equivalent to approximately two-thirds of the US adult populace. There may even be scope for the golden geese of California and Texas to enter the market, alongside potential newcomers like Florida and Georgia.
Looking beyond, Wasiolek anticipates further growth, predicting that seven additional states will legalize sports wagering by 2027, thereby covering nearly 90% of US adults. Additionally, the expectation is for iGaming expansion to also rise, particularly given states’ temptation to increase tax revenue through new streams such as these activities.
This structural change could result in a revenue explosion: Morningstar’s estimate predicts a stratospheric leap to $12 billion in 2027, up from a modest $6 billion last year.
The future also seems promising for DraftKings and Penn as trusted brands in the expanding domestic online sports betting market. Wasiolek envisions DraftKings augmenting its market share, stabilizing in the high 20s on a percentage basis. Penn’s ESPN Bet is also predicted to amass a greater market share, though perhaps not in the double figures believed necessary to instigate a major reshuffle. However, the prospect of increasing Penn’s US Sports and iGaming share to 6% by 2025 from just 4% in 2023, looks enticing for the firm
In this fast-paced, ever-evolving landscape, it seems certain that the gaming world will continue to draw interest not only from players and spectators, but also from investors on the lookout for the next big winner in the marketplace.
