There is no better time to look at this growing industry than off the back of Super Bowl LV which was set to be the biggest betting event of the year. Legally or illegally, CNBC reported that half of all Americans bet on Super Bowl LV. With mounting support for sports betting, it appears to be only a matter of time before it becomes widespread.
Gan Ltd Bull and Bear Case
Gan Ltd (NASDAQ: GAN) is a business-to-business provider of software, online gaming content, and support services that allow casinos to go digital. It was founded in 2010 and went public in 2020. It is not a pure-play in this space but undoubtedly benefits from the sports betting trend by powering online casinos. Gan reported a record 14.6 million bets settled the day of Super Bowl LV which surged 186% year-over-year (YoY).
Gan reported strong Q3 results with revenue growth of 86% YoY to $10.3 million with over two-thirds coming from the business’s casino arm. It reported a gross profit of $6.3 million but a net loss of just over $4 million.
Gan has many well-known customers such as Penn National Gaming, Churchill Downs, and FanDuel, its largest customer. Perhaps, its most notable customer acquisition is Wynn Resorts which signed a ten-year contract in Michigan for its sports betting. This could also provide growth in other states. It has an impressive retention rate of 85%, which demonstrates the stickiness of its business.
Gan entered into a definitive agreement to acquire ‘Coolbet’, an award-winning sports betting provider, to create a full solution to real money gaming. ‘Coolbet’ has a strong history of growth and over 84,000 active customers in Q3 which Gan will now get access to. This adds another dimension to its suite of products which should accelerate the business’s sports betting side, making up roughly 10% of total revenue.
This company is small, with a $1 billion market cap, and is likely to be volatile in the future. The most significant risk is customer concentration, with FanDuel making up just over 45% of revenue in 2019. Losing FanDuel would significantly impact Gan and cause losses to widen and set back its path to profitability. Its business model is also related to usage, and if this were to drop this would also have a negative effect on the business.
DraftKings Bull and Bear Case
DraftKings (NASDAQ: DKNG) is one of the biggest names in sports betting. The company went public through a highly publicized reverse-merger and has excited investors as one of the only pure-plays in the space.
In Q3, revenue came in at $133 million, representing 42% revenue growth YoY. It raised its guidance for the fiscal year, which equates to 25-30% pro forma growth but expects fiscal 2021 revenue to accelerate to 40-45%.
More than one million monthly unique paying customers used the app in the quarter, increasing 64% YoY. DraftKings currently operates in 10 states and entered Illinois in Q3, but is looking to expand “at the earliest opportunity”, according to CEO and co-founder Jason Robins. COVID-19 has also driven an increased response to advertising and has enabled the company to acquire new customers.
DraftKings’ mobile app is also set to be launched on the Google Play Store, which had previously been prohibited. This will undoubtedly give DraftKings access to a large number of potential customers on March 1st.
One of the risks of investing in DraftKings is the hype surrounding the industry and that it is one of the only pure-plays in the industry. Much future growth appears to be priced in as this stock is trading at 57x price to sales. In comparison, the largest U.S. gambling company, Las Vegas Sands, trades at 11x price to sales.
Its net loss also widened to $347 million from $161 million in Q2, but DraftKings emphasized that this was due to its expansion and marketing costs. Although companies are often unprofitable in growth mode, losses increasing at this rate are something investors should keep an eye on.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.
Contributing Writer at MyWallSt
Colm's favorite stock is Virgin Galactic as it is representative of his visions for our world in the future.