$DKNG and $PENN - Betting on Betting

5 feb 2021

For anyone who remembers the death spiral of March 2020 with DKNG trading at $10.60 and PENN trading as low as $3.75 you are either riding the wave or watching in wonder. Even with the impossible runs both have taken off their 2020 lows many debate where this “sports betting” trade will go?

Some points of consideration:

Size of Market

Since the PASPA repeal in May 2018 approximately 50% of the U.S. has some form of legalized sports betting. This number is a little misleading as a state like New York is included even with the very limited access to betting markets through Tribal agreements. When you consider California from a strictly GDP perspective you are talking about an economy roughly the size of the U.K.. And when you look at California, Texas, New York and Florida which are all starting to lean into true legalization conversations you are talking about 36% of U.S. GDP in those four states alone.

The other major component when trying to figure out total addressable market is the black or grey market for sports betting. The legalization of sports betting did not create a new market for sports bettors, it simply created access to one onshore in the U.S.. The debate for how big the black market is a fair one and only one part of it, the other is how long until it can be migrated onshore if at all.

When looking at market caps and market share it is clear that the original assumptions of the market were too small and are a major reason for the sustained push higher in the gaming sector with DKNG and PENN clearly out performing. As new states come on it should make you reconsider the true size the market to better align price targets.

Nielsen 2.0

Many debate the true value of both DKNG and PENN because those familiar with the sports betting industry understand that a sports book typically is a very low margin business (5-6%) that requires major expenses to acquire new customers with cost per acquisition being reported well over $1,000 per depositing player. If we take a step back and look at what a digital solution will offer operators we can begin to see the forest through the trees in how sports book and large gaming operators will be positioning themselves over the next 3-5 years.

In one word, data.

If we fast forward to 2025, who will know more about the sports fan than DKNG and PENN? Who will have access to mold and monetize the fan experience? When I was a kid I would watch Sportscenter on repeat. Today, these companies know every key stroke we make. The value of that data defines the true value of these companies in my opinion.

Conclusion

If you stop to consider both DKNG or PENN as marketing companies who are attracting players for other products like igaming or hospitality you can begin to see a true path to what I believe they are working towards. The recent M&A across the gaming and media space is a lesson in effective distribution. The momentum has been started with COVID and the March 2020 lows with digital channels becoming critical to future success.

The sports betting trade continues to be bullish as it will lead to much more than a single bet. Remember, as the old time gamblers will tell you, “sports betting is only the thing that gets you the thing”.

Author
Scott San Emeterio
CEO, BallStreet Trading - Hosting real-time markets on live sporting events.

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