The trend of igaming companies listing in the U.S. via special-purpose acquisition companies (SPACs) shows that investor appetite is strong as the nascent sports betting industry gets going stateside.

DraftKings has transitioned from daily fantasy sports to fixed-odds bookmaking with great success, merging with sports betting solutions provider SBTech and going live on the stock market with a group value of $3.3bn. The fact that the group now has a market capitalisation of $12bn, despite lockdown and so many sporting leagues being cancelled, shows the level of appetite and confidence U.S. investors have for online gambling companies.

The reasons are clear enough. Online gaming and betting is a promising new sector to invest in, even if the competition will be fierce and much consolidation can be expected in the next decade.

The COVID-19 health crisis has reinforced the arguments in favour of igaming. The pandemic has shown how important online channels are to all actors in the space, from brick-and-mortar casinos to sports teams that are unable to welcome thousands of fans through the turnstiles and are being deprived of millions of dollars in matchday revenues.

Scale of downturn

For the biggest states like California or New York that are still unregulated, the lack of licensing means more revenues being lost to offshore sportsbooks and casinos.

Figures published in July by Las Vegas Sands Corporation give an idea of the financial losses suffered. Sheldon Adelson’s company saw revenues drop 97% across its Vegas and Macau establishments. It recorded $98m in net revenue for the three-month period ending 30 June, compared with $3.3bn a year earlier. The company had a net loss of $985m for the quarter, compared with net income of $1.1bn a year earlier.

With Adelson being one of the fiercest opponents of regulated igaming in the U.S. and his casinos still allowed only 50% occupancy rates, it would be richly ironic if Sands Corp. invested in an online gambling venture as a way to stem the losses caused by the pandemic. Not that it is likely to happen.

Meanwhile, an established group like Penn National Gaming seems ideally positioned, as it sits at the intersection of online and land-based gambling and its 36% stake in Barstool Sports, although not without its own problems, gives it key traffic-generating content.

More important, the question is how sustainable the current valuations are. DraftKings is the highest profile of the companies to list following its acquisition of SBTech in December 2019, but Golden Nugget Online Gaming also listed in June through a SPAC valuing the group at U$745m and Rush Street Interactive has announced it would also go public in a deal valuing the company at $1.8bn.

DraftKings has attracted most of the headlines. The newly merged group recorded losses of $142m in 2019, rising to $161m according to its most recent filings. Still, it has $1.2bn of cash reserves on its balance sheet and has forecast $500m-$540m in revenues for 2020.

Complicated mergers
But as anyone who has followed igaming mergers over the years knows, these are not simple. The migration of player accounts onto a new platform is never easy at the best of times, and with SBTech having to deal with B2B clients who are already grumbling about focus being concentrated on the U.S. market, the process could be even more lengthy and fraught than it usually is. Any negative (and prolonged) impact on the user experience could cause much uncertainty.

And that’s without knowing how the Bet America sportsbook brand that is powered by SBTech, and for which parent company Churchill Downs Interactive has ambitious plans, might react if it feels it is adversely affected by the changes.

SBTech meanwhile recorded revenues of US$110m in 2019 according to the investor presentation from December, and 54% of those came from Asian unregulated markets, which adds regulatory uncertainty to DraftKings’ projections.

Nonetheless, investor confidence is high. The U.S. market is in the very early stages of its development and just as important, there aren’t that many U.S. igaming companies to invest in (at the moment).

Ed Birkin, senior analyst at H2 Gambling Capital, says: “U.S. igaming is a growth sector and investors want exposure to it and at the moment there aren’t many companies that can provide that. In addition, if you want to minimise your exposure to, for example, UK regulatory risk, then the U.S. is an obvious igaming market in which to invest. There is so much noise around the UK sector currently that these are issues the major investment funds are considering.”

The rise of online betting and gaming since 2018, in particular since the COVID-19 lockdowns, has reinforced its appeal, but how does the U.S., with its state-by-state markets and regulations, justify the valuations?

“If the shift away from retail or brick-and-mortar gaming continues and you think sports betting is a strong customer acquisition tool that can then be used to cross-sell players into casino, then investors will be looking with interest,” says Birkin. “But it leaves you with few options currently, which pushes the valuations higher. There are also questions about margins, deals with suppliers and land-based casino license holders that need be considered.”

H2 forecasts a U.S. online betting and gaming market worth $30bn by 2030 and clearly if investors want exposure to that growth, they will have to invest in the companies working in the field.

Strong track records

And while valuations are so high that some industry observers are asking if they are disconnected from the underlying fundamentals of the market, others believe the novelty of the industry in the U.S. means there is a lack of knowledge among investors.

For Birkin, the valuations are also related to companies’ track records. “They might seem eye-watering, but if you look at Golden Nugget, it has 36% market share in New Jersey and has just issued a strong set of results. DraftKings, FoxBet and Resorts account for 31% share in New Jersey under the Resorts licence. Investors want companies to invest and spend money. Will DraftKings come out as a long-term winner or should people follow a Bet365, which is going more low-key and banking on the quality of its sportsbook product coming through as the market matures? There are no right or wrong answers.”

And as the U.S. igaming market evolves and (hopefully) emerges from lockdown into an environment where capital is cheap and interest rates low, all the signs point to growing investor appetite for the sector in the near term.