Online sports betting stocks are primed for a big 2024 as fans ready for the Super Bowl

Published Sun, Jan 28 202411:03 AM EST

The sports betting landscape is dominated by DraftKings and Flutter's FanDuel. While that dynamic is unlikely to change, analysts say investors may want to wager on who will emerge as the victor in the battle for third place. "We see potential for a 'tier-2' operator to more firmly establish a No. 3 market share position," said Jeff Stantial, director of gaming and leisure research at Stifel. "Few mature international markets are as consolidated as the U.S. is currently, and we think there is room in the U.S. for a third operator to achieve 15%+ market share." Stantial pointed toward Penn Entertainment 's ESPN Bet as the gaming application that "attracts the most investor attention," but also noted privately owned bet365 and Fanatics as well as BetMGM are all in the running. BetMGM is a joint venture between MGM Resorts International and Entain . Big events like this weekend's matchups between the Baltimore Ravens and Kansas City Chiefs and the San Francisco 49ers and Detroit Lions to determine who advances to the Super Bowl are key times to bring in new users to sports betting platforms. In the same way, Flutter Entertainment's listing on the New York Stock Exchange on Monday may bring new investor focus to the sector. What they will find is a market that is still growing as additional states legalize sports betting, providing fresh opportunity for companies to compete. Entering new markets Online sports betting is legal in more than half of U.S. states, and North Carolina will begin to allow it in March just as the NCAA men's and women's basketball tournaments get underway. Bank of America's Shaun Kelley has predicted a roughly 18% increase in gross gaming revenue growth in 2024. The sector was a solid performer in 2023, with the Roundhill Sports Betting & iGaming ETF climbing more than 21%. For comparison, the benchmark S & P 500 added 24% last year. DraftKings and FanDuel occupy roughly 80% of the online sports betting market in the U.S., according to Stantial, which he attributes to "leading product quality, initial brand awareness investment, and advantages to scale relating to customer acquisition." DraftKings stock tripled in 2023 and has already gained nearly 10% in 2024. More than three-fourths of analysts covering the stock rate it a buy, according to FactSet. The average analyst price target implies roughly 6% upside for the stock moving forward. Meanwhile, FanDuel-parent Flutter will debut U.S.-listed shares on the New York Stock Exchange on Monday. This will make it easier for American investors to buy stock in the Ireland-based business. Its shares on the Euronext Dublin exchange traded for the last time on Friday. DKNG YTD mountain DraftKings stock. 'Buying' market share The remaining market share is up for grabs and fluctuates among the smaller players. Both BetMGM and ESPN Bet are best positioned to capture a more meaningful share, according to analysts. "You've seen ESPN Bet 'buy' their way to ~8% market share after launching in mid-November, but user retention after players exhaust their free sign-up bonus money is the key question," he said. ESPN Bet's strategy of "buying" their market share refers to steep bonuses and a strong marketing campaign aimed at capturing a younger cohort of online sports betters, which has so far worked out. But having some heft in this business matters, Stantial noted. He said companies that lack the overall size will lead to smaller players in the sector eventually falling off. "The formal exits of WynnBet, FoxBet, TwinSpires, Unibet, and fubo gaming all exemplify the challenges of competing in this industry without scale, and there is still a reasonably long tail of operators that have no realistic path to scale – in particular, as capital is no longer 'free,'" Stantial said. He says that these gaming brands account for less than 5% of the total market. Over time, he expects them to exit the market or be acquired. DraftKings and FanDuel have strong roots in the online sports betting sector. Both companies amassed large customer databases from the platforms' fantasy sports interfaces that were established before legal betting was widely available. The 2018 repeal of the Professional and Amateur Sports Protection Act, which limited online sports betting to a select few states, allowed DraftKings and FanDuel to capitalize on their already established users. Stantial expects ESPN Bet has the edge over BetMGM, but says both sportsbooks remain tightly contested for a larger slice of market share. "The two sports betting products are fairly close to parity, and you can argue there are advantages to ESPN Bet being purpose-built for the U.S.," he said. However, he added that BetMGM's advantages include being "very strong in customer acquisition and retention," and having the ability to "reinvest cash flows from their higher margin, top-3, online casino offering to help fund product development and customer acquisition in online sports betting." ESPN Bet has been running promotions that include $150 of free bets and $1,000 deposit match upon signing up, according to JPMorgan analyst Joseph Greff. He notes, however, that these promotions are largely in line with peers in the space. "ESPN BET is seemingly acquiring users that are looking for a more casual experience, with only 17% of users being drawn to the platform due to its wagering market breadth or most favorable odds versus 27% among all platforms," Greff wrote in a Wednesday note that referenced a recent survey his firm conducted. PENN YTD mountain Penn Entertainment stock. The Super Bowl and this weekend's conference championships could also be crucial for Penn Entertainment , the parent company of ESPN Bets. The company rebranded its Barstool sportsbook under the ESPN banner, which it licensed from Walt Disney , in August 2023. While Barstool was a brand that was popular among younger sports betters, Penn's new strategy leans into the broader ESPN brand and it has been marketing heavily around this launch. Penn Entertainment stock has slipped more than 10% so far in 2024. Analysts are very split on the company's outlook, with 58% of analysts polled by FactSet having a hold rating on the stock, and 42% saying it's a buy. The average analyst forecast implies about 29% upside for the stock over the next 12 months. Further muddying the picture is a rumor that DraftKings may strike a marketing deal with Barstool Sports. DraftKings shares rallied on the report Wednesday by Sportico , which cited people familiar with the talks. But without the details of a confirmed deal, it's tough to gauge what this could mean for Penn. MGM 6GI0-FF YTD mountain MGM Resorts International owns BetMGM in a joint venture with U.K. company Entain. JPMorgan's Greff has expressed concern about what happens when ESPN Bet's promotions slow, but the firm saw some promising trends in a survey it took of 1,180 people in January. "Encouragingly, nearly 90% of users who placed a bet on ESPN BET found the overall experience better than or about the same as other sports wagering platforms, 4 out of 5 ESPN BET users plan to utilize the platform in the future and 3 out of 5 would continue to use ESPN BET if they do not receive any additional promotions, reflecting solid retention potential," Greff said. "On the promotional environment, 76% of users indicated that a decline in promotions would not reduce their betting propensity, which we view as positive for operator retention and engagement," he added. And while both Bet365 and Fanatics are among the smaller players, Stantial argued both could find their footing to compete at the top level. "Bet365 continues to invest heavily in their U.S. product & user acquisition in a targeted geographic expansion," he said in an email. Fanatics, he says, "is vocal in a longer-term strategy focused on a differentiated & more intuitive user experience built off the acquired Pointsbet platform." Fanatics recently stoked speculation that it could be nearing a long-awaited initial public offering when it made some high-profile executive appointments. As the companies fight to win new business, analysts see good signs for demand as the football season draws to a close. BTIG analyst Clark Lampen cited recent New York data that suggests the quarter is off to "a good start." "Just three games remain and a solid January still has the potential to be swung by larger, more concentrated wagering activity with the conference championship games and Super Bowl LVIII," Lampen said.