With the NFL season nearly upon us, many leading Wall Street analysts are revising upwards their price targets on online sports betting (OSB) stocks.
DraftKings (NASDAQ: DKNG), which saw its share price close at $16.50 on Monday (down 40.58% for the year), and Caesars Entertainment (NASDAQ: CZR), whose stock closed at $44.14 (representing a loss of over half its value over the course of 2022), are two companies which are now being issued "buy" recommendations despite their share prices sinking throughout the year.
Wall Street bullish on DraftKings
Despite its sagging share price, Wall Street remains bullish on DraftKings. On August 17, Roth Capital Partners analyst Ed Engel raised the price target on the stock to $25, up from $18, while changing his rating from "Hold" to "Buy".
Overall analyst sentiment is also trending upward: TipRanks’ consensus analysts' short-term forecast for DraftKings is now $24.07, with $34 being the highest Wall Street target price for the stock as compared to the lowest target of $16.
As a pure online betting play, DraftKings is not subject to the kinds of recessionary risks faced by sportsbook casino operators. Although retail operators have thus far been immune from economic headwinds, they could yet face a Q4 downturn in retail wagering should the U.S. economy be pushed into a recession by the hawkish rising interest rate course charted by Fed Chairman Jerome Powell.
Caesars sportsbooks and casinos will benefit from NFL betting boost
This is why analysts are predicting that Caesars could also be a solid bet for investors over the coming NFL betting season.
"I really like Caesars," said Lamar Villere, portfolio manager with Villere & Co. "Heading into football season, there should be a boost for casinos and sports betting."
Villere also explains that since Caesars does not operate a casino in the Asian gaming capital of Macao, which has been subject to COVID shutdowns, it has not seen its earnings suffer — compared to MGM and Wynn, which do run major casinos there.
"Caesars is a pure domestic play," Villere said. "You don't have to worry about what's happening with China and Macao."
Many other Wall Street firms will likely be following suit in the coming weeks with the launch of the NFL season on Sept. 8 — and with Kansas becoming the latest state to offer legal sports betting with a soft launch on Thursday.
Early 2023 will see Maryland launch online sports betting (to couple with the already active retail component), with Ohio already set to launch on January 1 and Massachusetts also expected to go live early next year.
OSB stocks are seasonal outperformers
Over the last few years, OSB stocks have seasonally outperformed, between midsummer and the start of NFL season, as investors look to buy in advance of improved Q3 — and particularly Q4 — earnings reports.
Analysts projecting higher OSB share prices are also seizing on generally positive Q2 revenue figures, which saw FanDuel lead the way when it reported $22 million in positive EBITDA in the second quarter of 2022.
That represented a breakthrough for the gaming industry as FanDuel is the first U.S. sports wagering and online casino gaming operator to report a profitable quarter. None of the other major online gaming operators — DraftKings, BetMGM, and Caesars — are expected to go into profit until 2023.
Meanwhile, Caesars' digital losses were trimmed to $69 million in Q2, while it approached the break-even mark in July. Similarly, PENN Entertainment's digital arm is expecting to go into profit in the Q4 of 2022.
In the near term, the sports betting industry will benefit from the additional revenue generated by the addition of four new states to the online betting pool. This will likely enable the four major books (FanDuel, DraftKings, BetMGM, and Caesars), which already account for nearly 90% of Gross Gaming Revenue, to further consolidate their market share and force some smaller operators to the sidelines.
Flutter share price nearly even for the year
Only Irish gaming giant Flutter Entertainment Plc (LON: FLTR), the owner of FanDuel, has managed to recoup most of its share price losses for the year. In the wake of a 30% rally over the past 45 days, Flutter shares closed Monday at 10,846.75 GBX (pence sterling), the equivalent to $126 per share, which is a relatively modest decline of 6.77% since the beginning of 2022.
Meanwhile, shares of the MGM Resorts International (NYSE: MGM) are down by a hefty 25%, closing at $33.75 on Monday after trading as high as $48 in February.
2022 is another record year for sports betting
This is already shaping up as the best year in the history of the U.S. sports betting industry, as sportsbook and casino operators will report record revenue, record sports betting handle, and record wagering growth — powered by the rollout of mobile sports wagering in New York.
In the first half of 2022, overall gaming revenue figures stand at $29.16 billion, representing an 18% year-over-year gain over H1 last year. With this year's NFL season expected to outpace last season's wagering handle, gaming revenue for 2022 could very well dwarf first-half gains.
So why are share prices in gaming stocks still so low?
Wall Street focus on profitability, not market share
In the current inflationary environment, none of this long-term revenue growth is being priced in by investors when it comes to online betting stocks. In a softening stock market environment, Wall Street turns defensive and focuses on profitability — rather than market share — when it comes to valuations of the major sportsbooks.
Speaking at a Goldman Sachs 2022 Travel and Leisure Conference early in June, DraftKings CEO Jason Robins explained how market sentiment towards OSB stocks had shifted.
"Until about say four [to] seven months ago, market share was what we got asked at these conferences," Robins said. "How are you going to get your market share higher? Do you think that other players are going to take market share? Now it’s all about profitability…"
And with all of the major sportsbooks, save for PENN Entertainment, not expecting to reach profitability until late in 2023, this has dampened Wall Street's enthusiasm for the once high-flying OSB sector.
With most OSB shares still trading well below their 52-week highs, the prospect of another record-setting year for online NFL wagering may be just the tonic needed to snap gaming shares out of the doldrums.
