In a recent report JP Morgan forecast that the US sports betting market could be worth $9.2bn by 2025 - highlighting the potential linkage between betting and media companies. As things currently stand a very supportive macro backdrop pertains; further US stimulus on the cards; improving corporate earnings; increased vaccine production leading to better vaccination rates ultimately leading to a less restrictive lockdown, an increase in household savings, significant pent up demand, a likely acceleration in PMIs from Q2 and the potential for an upward surprise growth spurt. The best long-term scenario centres around the notion that eventually online betting will be available in 50 states in the US. In the shorter term simple pent-up demand is going to fuel consumer spending in places like Vegas - benefitting those with land based operations - but they are likely to be badly impacted by worsening relations between the US and China (the upending of the Macau Casino Trade). Morgan Stanley recently pointed out just how much free cash there is on the sidelines in the US: "Cumulatively, the Covid-19 recession has cost US households US$400 billion in income, but they have already received more than US$1 trillion in transfers (even before the late December and forthcoming rounds of stimulus). Households have already accumulated US$1.5 trillion in excess saving, which is set to rise to US$2 trillion (9.5% of GDP) by early March once the additional fiscal package is enacted." And whilst the popular narrative is that it will all be spent on penny stocks, we can be sure as hell that quite a bit of it is going to be contributing to a rebound in regional gambling and further growth in online sports betting. Regarding the latter Morgan Stanley recently said:
“While it's risky to predict legislative rollouts for Gaming-related causes, our extensive channel checks suggest that 2021 should stand out as an exceptionally strong year of legalization, driven by COVID-related budget deficits. We expect AZ, CT, KS, KY, LA, MA, MD, MO, OH, OK, SD, and TX to legalize sports betting in 2021, NY to legalize online sports betting, Ontario to legalize, and 2-3 states to legalize iGaming, setting up an attractive catalyst path for those exposed to the theme.”
To the downside - hardly rocket science - unpredictable covid evolution and the failure to develop multi-variant vaccines. To the downside generally: whilst the Fed has stuck to the same message since the pandemic hit, the strength of the economic recovery in the U.S. coupled with the strong sell off in bond markets may prompt it to change course sooner than most people seem to be anticipating. And it is looking increasingly likely that the discussion around tapering will have to take place in 2021 - something that is going to be very negative for equities especially tech stocks (Tesla). But gambling stocks will not be immune to any broader market sell off.
A crowded playing field - as ever, everybody wants a slice of the action, which in the short term is going to lead to an increase in promotional costs
as competition for market share heats up.
Whilst Bank of America expects DraftKings to top revenue expectations when it reports earnings on Friday due to better than expected state reported GGR contributing to an increase in market share in iGaming. To the negative downside BOA suggest that the company may well report elevated promotional spend and they point out that there are 60M shares due to come off their lock-up period which could lead to short-term price pressure.
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