Sports betting stocks have been on a tear of late as U.S. legalization becomes a reality. And many investors see more upside ahead.
The catalyst was a U.S. Supreme Court decision when the court struck down the Professional and Amateur Sports Protection Act of 1992. Commonly referred to as “PASPA,” the act restricted sports betting to just four “grandfathered” states: Nevada, Oregon, Delaware, and Montana.
The state of New Jersey sued to overturn the law and won at the highest level. The decision has opened the door for individual states to legalize sports betting. 14 states now have some form of legalized sports betting. Seven others have seen laws enacted and await their first bet.
The size of the opportunity has drawn investor attention. Special purpose acquisition corporation Diamond Eagle Acquisition (NASDAQ:DEAC) is merging with well-known fantasy sports and online sports betting operator DraftKings. DEAC has soared 70% since the deal was announced on Dec. 23. Penn National Gaming (NASDAQ:PENN) has gained over 45% since announcing the acquisition of a stake in Barstool Sports last month.
In both cases, however, the gains raise valuation concerns. Diamond Eagle, for instance, has a pro forma market capitalization over $5 billion. In those names, the easy money may have been made.
But investors have opportunities elsewhere for exposure to sports betting. These three stocks are among the most attractive, particularly for investors who believe the market will be huge.
The Stars Group (TSG)
The Stars Group (NASDAQ:TSG) historically has been known for its PokerStars online poker business. But the story now has changed.
Stars is being acquired by European operator Flutter Entertainment (OTCMKTS:PDYPY). The combination will create a worldwide leader across multiple forms of online gambling.
But what makes the deal of particular interest to investors interested in U.S. sports betting stocks is Flutter’s ownership of a majority stake in FanDuel. DraftKings has dominant market share in daily fantasy sports. It owns at least 60% of the DFS market, according to the Diamond Eagle prospectus filed with the U.S. Securities and Exchange Commission.
In the early going in sports betting, however, FanDuel is leading. Its market share is near 50% in both New Jersey and Pennsylvania. Meanwhile, Diamond Eagle’s numbers show that DFS is not a profitable business. DraftKings (along with technology provider SBTech, which is being picked up in the deal) is valued at $5 billion-plus because of its sports betting opportunity, not its daily fantasy sports market share.
So what is FanDuel worth? If it continues to win nationwide, its valuation could be in the billions. Yet the acquisition by Flutter was at a valuation of roughly $450 million.
If FanDuel wins in sports betting, it can add significant value to the Stars/Flutter combination. And with TSG and PDYPY actually pulling back of late, that value is not priced in.
GAN plc (GMMNF)
GAN plc (OTCMKTS:GMMNF) has been another beneficiary of the rally in sports betting stocks. Shares have nearly tripled since September. But there are reasons to see more upside ahead for the small-cap stock.
GAN is a B2B (business-to-business) provider of software to real-money gaming operators. Its growth has been spectacular: revenue increased 145% in the first half of 2019, and the company turned profitable.
That growth has plenty of runway as U.S. sports betting takes hold. In fact, FanDuel is a key GAN client. Revenue-share agreements will allow GAN to participate in its growth.
At the moment, GAN stock only is listed on the junior exchange in London. But that will change: the company is seeking a listing on the NASDAQ exchange. That listing could lead to a huge increase in interest from U.S. investors. That alone will keep the current rally going.
Churchill Downs (CHDN)
I’ve personally questioned the valuation assigned Churchill Downs (NASDAQ:CHDN) and still do. But there aren’t any cheap sports betting stocks out there, and CHDN has an interesting under-the-radar story.
After all, Churchill Downs has spent years preparing for the legalization of sports betting. The company has expanded from its legacy horse racing operations into online betting and brick-and-mortar casinos. The company’s TwinSpires dominates online horse racing (which remains legal at the federal level). It also gives the company an existing tech stack to support its online sports betting ambitions.
Again, valuation is a concern, and for now the value remains in the company’s owned casinos and its namesake track in Kentucky. But Churchill Downs has been preparing for this moment for years now, and there’s a real chance that preparation could pay off.
As of this writing, Vince Martin has no positions in any securities mentioned.