Wall Street debates whether the sports betting market will be big enough to support the stocks

Published Mon, Oct 19 20207:21 AM EDTUpdated Mon, Oct 19 20208:02 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

(This story is for CNBC Pro subscribers only). Everyone on Wall Street seems to agree that sports betting is about to become a big business, but how big is a matter of debate. Estimates of what the total addressable market for sports gaming will be in a decade vary widely among analysts and investors. The midpoint is in the range of $20 billion annually, supported by firms like Cowen and Credit Suisse, but projections can swing by 50% or more in either direction. The more bearish forecasts, like Deutsche Bank's estimate of $10.4 billion in 2027, would likely make the current valuation of some popular stocks hard to stomach. "For every New Jersey, there's a West Virginia and an Iowa … and this is why big picture math doesn't work," Deutsche Bank said in a Oct. 11 note. The boom for gambling stocks has been fueled by speculation about the adoption of sports gaming around the country and a wave of partnership announcements with celebrities, teams and television channels . The Supreme Court paved the way for sports gambling to be legalized across the country two years ago, and with states scrambling to fill revenue holes caused by the coronavirus recession, many have pointed to sports betting as an untapped revenue stream. Investors aren't waiting on state politics. DraftKings , the closest thing available to a pure-play sports gambling stock, has rocketed to a market cap of roughly $17 billion after going public through a reverse merger in April. Penn National Gaming , which has a market cap of about $11 billion, has seen its stock price jump more than 170% since announcing that it was buying a stake in Barstool Sports in January. Exactly how long it will take legalized gambling to wind its way through statehouses is just one major factor when analyzing the size of the market, said Kevin Rippey, an analyst at Evercore ISI. "Embedded within every estimate of TAM is an estimate around when states ultimately legalize," Rippey said. His firm estimates that about 75% of the U.S. population will live in states where the gaming is legal by 2030, with total industry revenues around $20 billion. Another factor is how much per capita betting will actually take place. New Jersey is the most mature U.S. market for mobile sports betting, but it's not generating enough to justify a $20 billion valuation for the national market, Deutsche Bank said. "Given there are 240 mm adults in the U.S., to arrive at even a $20 bn TAM ($83 per adult), implies that not only does every state legalize and all 240 mm adults can bet sports on their mobile phones, but that the New Jersey per adult spend grows by ~65% from this $51 level as well," Deutsche Bank said. The investment firm, which has a hold rating on DraftKings, pointed to New Jersey's relatively high per capita income and "cross pollination" with bettors from neighboring states playing in New Jersey as reasons to believe that other states can't match those spending levels. David VanEgmond, a former executive at FanDuel and Barstool Sports who left to start a venture capital firm focused on sports gambling, disagreed with that idea. VanEgmond, who still holds equity in Barstool, said that growth of the total addressable market from legalization in states like New York would overcome any issues regarding betting across state lines. Discussions about the size of the sports betting market also include different estimates of handle and hold. The handle is the amount actually bet on sports over a given amount of time, while the hold (or "vig") is the revenue earned by the book — and it can be impacted by the "juice" on the odds or promotions, like free bets for new sign ups. The hold is around 6% to 7% for DraftKings, but about 9% for betting operations in the United Kingdom, according to Credit Suisse. While the company projects 6.5% to be the norm going forward in a securities filing, Credit Suisse thinks the hold rates should eventually be "similar if not greater" domestically compared with results across the pond. One reason Credit Suisse is more bullish is the prospect of in-game betting, which could make more sense in U.S.-centric sports many stoppages in play, like American football and basketball. "We think volumes will also benefit as consumers who are already engaged in a game they are betting on will have additional unique opportunities to bet throughout the game. To this point, we think in-game mobile betting is additive from an ARPU [average revenue per user] standpoint but also generates interest from incremental players," Credit Suisse said in an Oct. 12 note. Simple geography is another factor that works in favor of the U.S. market, VanEgmond said, because major European sports happen in the middle of the day for domestic bettors. "There's just so much frequency, starting kind of like midday with European sports and then all through the night. There's just so much more to bet on in the U.S. I think that's fundamentally the big difference more so than live betting, which I think at maturity will parallel the U.K. market," he said. VanEgmond estimated that the total addressable market for sports betting in the U.S. will grow to $30 billion or more, with that surpassing $50 billion when nonsports iGaming is considered. Even with the wide variety of opinions, the Street is bullish overall on the industry's two main stocks. According to FactSet, DraftKings has buy ratings from 64% of its analysts and no sell ratings. Penn also has 64% buy ratings and just 7% sell ratings. "This is no time to get hung up on valuation," Needham said in a Sept. 30 note that initiated coverage of DraftKings with a buy rating. Disclosure: CNBC parent Comcast and NBC Sports are investors in FanDuel. — CNBC's Michael Bloom contributed to this story.

The entrance from the elevators, designed to resemble a tunnel entering a stadium, is pictured at the DraftKings office in Boston.

David L. Ryan | The Boston Globe via Getty Images

(This story is for CNBC Pro subscribers only).

Everyone on Wall Street seems to agree that sports betting is about to become a big business, but how big is a matter of debate.

Estimates of what the total addressable market for sports gaming will be in a decade vary widely among analysts and investors. The midpoint is in the range of $20 billion annually, supported by firms like Cowen and Credit Suisse, but projections can swing by 50% or more in either direction.