DraftKings/online gambling: betting boom is no winning ticket

Americans are placing big bets on sports. Wagers are smashing records as more US states legalise online gambling. Punters put down more than $26bn in the first quarter, including an estimated $8bn on the Super Bowl, according to the American Gaming Association.

Yet the betting boom has done little to lift the fortunes of sports betting stocks. Shares in DraftKings and FanDuel-owner Flutter Entertainment, the two leading US sports gambling sites, have slumped 75 per cent and 47 per cent over the past 12 months. Bookmakers Penn National Gaming and Caesars Entertainment have each lost about 58 per cent of their market values over the same period.

The problem is not interest in online betting. At DraftKings, the number of average monthly unique players grew by 500,000 to 2mn during the first quarter and helped drive a one-third increase in revenue to $417mn. Flutter’s FanDuel division in the US boasts even bigger gains. First quarter revenue grew 45 per cent to $574mn while the number of monthly players jumped 43 per cent to 2.4mn.

The issue is spending. The US market is fiercely competitive. Sports betting companies have expanded advertising and marketing budgets to court new users and fight for bigger market share.

DraftKings’ operating expenses totalled $933mn — more than twice revenue — in the first quarter. Of this, a third was spent on sales and marketing. At Flutter, sales and marketing accounted for nearly half of US revenue in 2021.

Rising interest rates mean investors lack patience for lossmaking companies to break even, even if they are fast growing. Companies keen to draw shareholders back are taking note.

DraftKings and others have made a point to say they will pull back on spending. At its peak in 2020, DraftKings traded at 61 times estimated revenue. This has fallen to under 4 times. But until a clearer path to profitability emerges, investors should avoid placing their chips.