This content has been produced by Opto and was originally published on the Opto Blog.
Entain [ENT.L] is one of the biggest gambling companies in the world. A member of the FTSE 100, it offers everything from online sports betting (through its betting brand Bwin), to bingo halls (Gala Bingo) and high street bookies (Ladbrokes).
Last year, Entain’s US digital competitor DraftKings [DKNG] attempted an audacious £22.4bn takeover bid for the company in an attempt to give it an instant high street presence in the UK.
That bid ended in failure, but the two companies represent something different in gaming. Along with competitors such as Penn National [PENN] and Wynn [WYNN], DraftKings’ business has surged as sports betting in the US opens up state by state. Entain targets a broader demographic through its different brands, although it does compete with DraftKings in the US with its partnership with BetMGM, the sports betting division of MGM Resorts International [MGM].
What both companies have in common, however, is a slump in their respective stock prices this year. Entain’s share price has fallen 8% since the start of 2022, closing Tuesday 15 March at 1,548.5, while the DraftKings share price has suffered a steeper 41.3% drop over the same period. This could represent good value for investors as both seek to cement their place in the gaming sector.
Tailwinds for DraftKings and Entain’s share prices in 2022
The end of lockdown restrictions could benefit Entain as punters return to high street bookies. Entain’s physical locations like Ladbrokes are an important revenue driver, and in January it reported that retail net gaming revenue had surged 60% in the final three months of last year.
In 2021, retail EBITDA totalled £67m, down 7% overall due to store closures in the first half of the year. Online net gaming revenue increased 13% year-on-year for Entain in 2021, its ninth consecutive year of double-digit gains.
DraftKings is primarily focused on the growing online sports betting market in the US, although it also has a number of physical casino-based locations. According to Mordor Intelligence, the online gambling market in the US was worth $2.18bn in 2020 and is projected to achieve a compound annual growth rate of 17.34% between 2021 and 2026.
In an investor presentation, DraftKings pointed to the easing of gambling restrictions in the US as a growth driver, highlighting that 10 state legislators have introduced legislation to legalise mobile sports betting this year. Notably, DraftKings increased its guidance for 2022 revenue and adjusted EBITDA after the launch of mobile sports betting in New York and Louisiana.
Entain is also targeting the US through its partnership with BetMGM. In the US, Entain’s net gaming revenues (NGR) were $850m in 2021, establishing 23% market share in the 21 jurisdictions it operates. BetMGM has an addressable market of around 37% of the US adult population.
Analyst calls on Entain and DraftKings
Entain’s full year 2021 results were solid, with total revenues of £3.8bn NGR, up 8% year-over-year, while underlying operating profits were £484.1m. DraftKings, on the other hand, posted a net loss of $1.52bn for the year, despite more than doubling its revenue year-over-year.
Victoria Scholar, head of investment at Interactive Investor, said that Entain’s earnings had managed to “outpace forecasts”, but noted that the company had “yet to resume the dividend” that had been paused at the height of the pandemic. Scholar notes that the company has the potential to attract more M&A interest this year, having rebuffed DraftKings in 2021.
DraftKings was the top stock pick of Morgan Stanley’s Thomas Allan at the start of March. He said that there was too much focus on short-term losses, while his state-by-state estimates “suggests long-term profitability to be much larger than forecasted”. Allan has a $31 price target on DraftKings.
On 7 March, Argus’s John Staszak downgraded DraftKings to ‘hold’ from ‘buy’, trimming both his revenue and EPS forecasts for the company. The analyst cited competition from MGM and Wynn, and fewer states left to approve online sports betting as factors in his decision.
Where management sees opportunity
As more states legalise online gaming, that could mean more revenue opportunities for both Entain and DraftKings. Conversely, it means there are fewer markets left to open up and, as a result, there could be less potential for future growth. Entain’s mix of physical and online, along with diversified businesses aimed at different audiences — such as Gala Bingo — could not only provide resilience but also growth opportunities with lockdown restrictions ended.
Either way, both companies are talking up a strong game for 2022 and beyond. Following the collapse of DraftKings’ takeover bid, Entain restated its business strategy, saying it was focused on executing its growth and sustainability agenda, which could lead to a trebling of its total addressable market to around $160bn, with US business accounting for $32bn.
However, the fall in the DraftKings share price may not be sustained, especially if it manages to increase revenues in 2022. Management seems confident, having issued full year guidance up to $1.93bn, anticipating launches in new states.
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
Guest Author at MyWallSt
The investment universe is changing beyond all recognition, and with a thematic focus, investors can capitalise on this wholesale disruption. From Genomics to Artificial Intelligence, disruptive innovation empowers companies to displace industry incumbents, and secure majority market share. Opto exists to identify those businesses, and help investors to invest in the next big idea.