The boost in shares of the online sports gambling leader DraftKings since the start of 2020 has been mobilized by expectations that the country’s most populated states—California, Texas, Florida, and New York—will legalize the business in the years to come.
The optimism has been based on a forecast that those big states would authorize online sports gambling in a way that would eventually be lucrative. The business now resides in the red amid fierce competition among leading companies.
Despite that, Governor Cuomo has other ideas. In announcing his support for online sports gambling Wednesday, he indicated that he wants the economics to kickback to New York state in taxes rather than to shareholders of companies like DraftKings [$DKNG], Penn National Gaming [$PENN], Caesars Entertainment [$CZR], MGM Resorts (MGM), and Flutter Entertainment [$PDYPY], which owns FanDuel.
DraftKings and FanDuel have parlayed their ascendency of fantasy sports to leading positions in New Jersey, which has the largest and most developed online sports betting industry in the country. Make no mistake, this ups the risk that New York and other big states will either look to control online sports gambling through a lottery-type system or heavily tax it the way Pennsylvania currently does and leave piecemeal profit for sports betting operators. Gaming Companies to Watch in 2021
Cuomo’s remarks dulled investor vigor as DraftKings ended Wednesday at $49, up 3%, after trading as high as $51.80. In early trading Thursday, DraftKings, whose shares have 4x’d in the past 12 months, was up 2.2%, to $50.09.
In a client note Wednesday titled “Beware the N.Y. Tax Rate,” Morgan Stanley analyst Thomas Allen asserted that New York could adopt a tax rate closer to Pennsylvania’s retributive 36%, rather than New Jersey’s 14.25%. Allen mentioned that a high New York tax would run counter to the trend of lower tax rates in states that have passed online sports gambling, including Michigan at under 10% and Virginia at 15%. More than a dozen states have licensed online sports betting accounting for 25% of the U.S. population.
It’s become evident that Cuomo doesn’t want to follow New Jersey’s path. Sports betting has amassed about $80 million in tax revenue for New Jersey since 2018 and $45 million in the last 12 months despite booming activity. Sports gambling revenue in New Jersey, mostly online, totaled $332 million in the first 11 months of 2020, up 23% versus the same period in 2019, with activity rising in recent months as professional sports reopened. The total online sports betting handle, or amount wagered, in New Jersey was $4.6 billion in the first 11 months of 2020. Sheesh!
“Many states have done sports betting, but they basically allow casinos to run their own gambling operations,” the New York governor said. “That makes a lot of money for casinos, but it makes minimal money for the state and I’m not here to give the casinos a lot of money. I’m here to raise funds for the state, so we have a different model for the state.”
In reference to New Jersey, Cuomo’s budget director announced that the state was pushing to generate $500 million in annual revenue, not $50 million, from online sports gambling. Online sports gambling companies like DraftKings are spending bigly on marketing, including free first-time wagers of $500 or more to attract new customers and build market share. The Truth Behind Mobbed Up NFL Franchises
DraftKings lost $578 million, or $2.08 a share, on revenue of $292 million in the first nine months of 2020. The company said in November that it estimated $750 million to $850 million in 2021 revenue, up from a prediction of about $550 million in 2020.
DraftKings’ climbing stock price and lofty market value of $20 billion—plus the growth potential of online sport gambling—have triggered U.S. casino operators to move purposely into the area.
Caesars has a nearly $4 billion deal to buy its U.S. sports gambling partner, William Hill [$WIMHY], a U.K. gambling company. MGM Resorts upped the ante on Monday by offering to buy Entain PLC [$GMVHY] for $11 billion in stock. Entain is a 50/50 partner in BetMGM, MGM’s U.S. sports gambling business. MGM offered an all-stock deal with the possibility of a partial cash alternative for Entain holders. Entain has dubbed the offer inadequate. MGM is Back on the Prowl
The readiness of MGM, the leading operator of hotel/casinos in Las Vegas, to give Entain holders 41.5% of the combined companies shows its commitment to sports gambling. Entain, formerly GVC Holdings, owns Ladbrokes and is one of the leading sports gambling companies on the planet.
The recent surge in deal-making is predicated on yuge growth in online sports gambling as more states allow it. But investors could be let down if big states like New York do permit it but decide to pocket most of the profits.