- Twenty states have legalized sports betting in recent years and several others are trying to join the club.
- Legalizing sports betting could lead to an increase in revenue for states and it could also present investors with an attractive opportunity in 2020.
- "While we believe investors are generally aware of the opportunity, the stocks don't appear to be discounting it," says a Morgan Stanley analyst.
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States are increasingly pushing for the legalization of sports betting and it could present investors with a grand opportunity in 2020, Wall Street analysts think.
Pennsylvania made sports gambling legal in 2017. New Jersey joined Pennsylvania in June 2018. More recently, Michigan's state government signed into law a series of bills that will allow residents to wager on sporting events next year. Montana, North Carolina and West Virginia are also among the 20 states that have legalized sports betting.
The rapid adoption of sports betting not only has the potential to boost state revenues. It also could make certain gaming stocks a more attractive investment in the new year.
"While we believe investors are generally aware of the opportunity, the stocks don't appear to be discounting it," said Morgan Stanley analyst Thomas Allen in a recent note.
Allen noted that while U.S. sports gambling revenues are expected to surpass $800 million this year from $249 million in 2017, gaming stocks are lagging the broader market since the Professional and Amateur Sports Protection Act was repealed in May 2018.
The S&P 500 is up nearly 20% in that time. MGM Resorts, meanwhile, has gained just over 3% since then while Boyd Gaming has lost about 15%. Penn National Gaming has plummeted more than 24% in that time.
Yet, these stocks are all leveraged toward sports betting. MGM, for example, has its own sports wagering mobile application. Boyd Gaming announced last year a strategic partnership with daily fantasy football giant FanDuel. Penn National also signed earlier this year a sports betting deal with FanDuel-rival DraftKings.
"We do not believe investors have been willing to underwrite sports betting yet, but if we enter a new mini cycle, we expect investors will start to pay attention more in 2020," said Allen, who expects the sports betting market to reach $7 billion in revenue by 2025.
James Wheatcroft, an equity analyst at Jefferies, is even more bullish on sports betting. By 2023, he estimates the U.S. sports betting market will grow to $13 billion.
That estimate, he said in a note, "which looks increasingly conservative" given how fast states are moving to legalize sports betting. " However, conservatism is prudent given the time between legalisation and implementation could be ~12 months."
Wheatcroft said Churchill Downs and Eldorado Resorts should benefit from a sports betting boom. These stocks were on fire this year. Churchill Downs jumped more than 65% in 2019 while Eldorado rallied nearly 60%.
Deutsche Bank analyst Carlo Santarelli pointed out that early revenue figures from sports betting have been "underwhelming," but noted that as states such as Iowa and Indiana start taking in sports wagers, "we expect to see a more pronounced investor focus on the impact of sports wagering on the brick and mortar operators."
Penn National Gaming and Boyd Gaming are among the companies that could benefit from these trends given their regional exposure, Santarelli said. Penn and Boyd shares are up 38.7% and 47%, respectively, for 2019.
—CNBC's Michael Bloom contributed to this report.