The components are in place for U.S. online operators to start being profitable, but the race to beat the clock and economic headwinds is also on.  

The first quarter results season that is coming to an end has led to a familiar refrain from online betting and gaming operators whenever they were asked about timings for reaching profitability. Most gave timeframes that ranged from the end of this year to the end of 2023 and into early 2024.

Those timeframes were broadly expected, but it hasn’t stopped investors and the all-important market sentiment towards the industry from hitting all-time lows. This has resulted in share price downgrades, Wells Fargo suggested this week that U.S. gaming investors were pricing in a 5%-10% revenue decline in 2023 and the same percentage fall in EBITDA. 

And although most analysts are positive on the industry’s long term prospects, the spectre of operators having to raise cash towards the end of 2023 also looms on the horizon.  

Even if the losses (and timescales) are broadly as expected, their scale is still worth mentioning. 

Major losses 

DraftKings by some distance is the operator that is under the most scrutiny. The group has forecast full year adjusted EBITDA losses of $760m-$840m, which is around $75m less than previous estimates. CEO Jason Robins and CFO Jason Park have been clear the group will not need to call on investors to raise more money, but if they do there is no doubt the markets will react very badly to the news.    

Park has also pointed to the savings that will be created by DraftKings advertising on a national scale and $300m synergies that will come from the integration of the Golden Nugget Online Gaming brand.    

Meanwhile Caesars Entertainment CEO Tom Reeg also revealed some startling (if somewhat less noticed) figures during the company’s investor call in early May.  

He said first quarter losses had totalled $554m, and, commenting on what the overall number could be for the full year, Reeg added: “If you think about the investment that we talked about in terms of cumulative EBITDA losses, we said north of a billion in my mind when I made that statement when we launched in August. I was thinking a billion and a quarter to a billion and a half based on where we’ve gotten.”

To be fair, Caesars has come to the party later than DraftKings, FanDuel or BetMGM, the brands it sees as its main rivals. But those numbers are still huge and give an idea of the costs involved in U.S. online sports betting. But then DraftKings also recorded losses of around $1bn in 2021, so maybe we shouldn’t be that surprised.     

It’s all about timing 

The comment has been made at length recently, but timing could not have been worse. U.S. gambling brands are under pressure to hit profitability just as capital is getting harder and more expensive to access and the global economy teeters on the edge of recession. These factors are causing uncertainty and doubt among investors.  

To its credit, Draftkings’ first quarter losses were $50m lower than forecast at $290m and, as the group says, its path to profitability theory seems to be working.

“We are seeing faster ramps and paths to profitability. There are no hard rules, but it’s certainly moving in a positive direction,” Robins commented during the group’s first quarter investor call. Although of course that will be of little comfort if the group, or any other operator, needs to raise cash at some point in the next 12-18 months.   

In terms of regulatory developments, the financial pressures operators face are exacerbated by the fact that legislative progress in states that really would move the needle — California, Texas or Florida — is painfully slow to non-existent. 

Online casino meanwhile shows few signs of being regulated at scale, despite hopeful comments from industry executives. In fact, when it comes to icasino, only Connecticut has regulated the vertical in the past 12 months, which makes it the sixth state where the vertical is regulated, which compares with around 26 states where sports betting is currently legal. 

In the U.S., the effect is compounded by the fact that investors are new to online betting and gaming and in effect are getting to grips with the economics of the sector.

This is especially the case in a market that operates state-by-state with similar but different accounting procedures, notably with regard to gross and net gaming revenues and tax deductions related to promotional spend.   

iCasino coefficient 

In addition, the financial benefits of online casino are clear. In a recent note, Morgan Stanley forecast that U.S. sports betting would be regulated in 42 states and the industry would generate $12.8bn in annual gross revenue by 2025, with Florida among the top five markets, California as a retail-only market and Texas still not having legalized sports betting by that time. 

Online casino meanwhile would be regulated in just 11 states, up from the six jurisdictions where it is currently legal, but would generate $7.8bn, or 64% of the gross revenue that would come from sports betting being legal in 42 states, by 2025. 

As the cold winds of recession — or at least some kind of macro downturn that could potentially have a significant adverse impact on the industry — start to be felt, at least U.S. online operators are well positioned to weather the upheavals. 

As Regulus Partners remarked in a recent update, thanks to being on the path to becoming regulated (sports betting, at least) in most U.S. states, interactive betting is riding the crest of a wave and is underpinned by high digital adoption; it is also more accessible and cheaper to take part in than land-based gambling. 

The next 18 to 24 months without a doubt will be eventful. The hope is that broad-ranging regulation can generate the scale and momentum that drives profitability levels up quicker than even the most optimistic observers might have hoped.