Despite most gambling tickers hovering near 52-week lows as recession warning sirens blare louder, the sports gambling sector could be an attractive play through the rocky economic environment, according to one analyst.
“The churn rates have been pretty low,” Macquarie Analyst Chad Beynon said on Yahoo Finance Live recently (video above). “The engagement, the retention of the tech that we're seeing out there has been pretty good, and there haven't been any new companies to come in the space in the past couple of months. So we really like the stocks at these levels. I know everything was down about 20% in the last week, but everything is according to plan. That's what we're hearing from these companies.”
DraftKings (DKNG), MGM Resorts International (MGM), Penn National Gaming (PENN), and Caesars (CZR) are all down at least 35% this year. Yet, Beynon and Macquarie have maintained a 'buy' rating on all those equities.
“What we've seen during the second quarter, which is seasonally one of the lowest quarters of the year, is some outperformance,” Beynon said. “That's come on the revenue side with more what we call single game parlays.”
The case for owning gambling stocks is built around customer retention, Beynon explained, which has been strong after companies shelled out millions in promotional dollars during the opening of operations in New York state. He noted those marketing spends are expected to trim lower throughout the summer before possibly returning briefly at the start of NFL season.
Meanwhile, mobile sports wagering handles in New York have fallen from a high of $1.67 billion in the opening month of January to $1.2 billion in May, but net revenue — gained by each platform after bettor wins are paid out and taxes are accounted for — hasn’t wavered much. The net revenue paid to providers in May sat around $53 million, better than both April and February.
Single-game parlays encourage bettors to wager on more than one outcome in a given game. For example, during the NBA Finals, a bet could’ve been made on the Golden State Warriors to win the game and guard Stephen Curry to score more than 30 points. Companies like DraftKings and FanDuel (PDYPY) ran heavy promotions on such bets throughout the NHL and NBA playoffs.
Beynon believes this is part of a larger strategy to make gambling a more engaging social experience as the more people interested in smaller parts of the game, the more companies can profit off their customers wagering. This could prevent companies from overspending on marketing promotions to bring gamblers back to the apps.
“If the engagement and the retention tools are working, you don't have to" bring back promotions, Beynon said. “What we saw in New York, which was probably the most heavily promoted state, early giveaways between $1,000 and $3,000 to acquire that customer, you still have to do odds boost and reload bonuses to keep that player engaged. But it's really some of the tools that they have in the app right now, the single game parlays, sharing your bet slip, betting or fading your friend's bet, so more of that social environment.”
Despite consumers feeling the effects of rising gas prices and other pricing pressures, those following the gambling space haven't seen a large enough impact to negatively impact the industry. DraftKings CEO Jason Robins told Yahoo Finance in May that inflation had “zero impact” on their business. On June 1, Bank of America released a note flaunting the opportunity in gaming stocks amid a recession.
Just last week, Beynon told Yahoo Finance that’s held true thus far at brick-and-mortar locations where visitation has remained steady through early June. Overall, though, spend from “lower-end” customers has fallen about 5-10%. That pullback will be the key indicator to watch moving forward.
“The average player in a database on a sports betting side loses a little under $1,000 a year, so that certainly is a number that we're going to be looking at as gas prices continue to rise and inflation sets in here,” Beynon said.
Josh is a producer for Yahoo Finance.