The Supreme Court recently ruled that individual states can choose whether to legalize or prohibit sports betting, voiding the Professional and Amateur Sports Protection Act of 1992 and paving the way for legalized gambling on all types of sports events outside of Las Vegas.
This was big news, and it opens up a lot of opportunity in an industry that probably wasn’t on a lot of investors’ radar. In fact, Bank of America predicts that the gross revenue from legal sports betting will increase from the current $200 million annually to $5 billion-$10 billion in the next five years. The low end of that range represents a 25X gain and suggests that there will be some big winners among gambling stocks if this growth comes to fruition.
The firm also mentioned that the gaming technology providers will see revenue increases as well, and I couldn’t agree more. Bank of America said it could see incremental annual sales opportunities between $250 million and $1 billion, but I think the upside is even bigger.
Consider this — Americans currently wager around $150 billion per year on sporting events through illegal channels. Once that money funnels into the new legal avenues, the $200 million industry could well be worth $20 billion, resulting in growth of 100X.
And there are a lot of potential opportunities out there for us to capitalize on this.
How to Play the Growth in Gambling Stocks
To absolutely nobody’s surprise, a number of casino-related and gambling stocks rallied when the news of the court decision was released. Two in particular stand out, so let’s talk about them.
One of the biggest movers, which also happens to be a company that has been a big winner over the last year, is Stars Group Inc (NASDAQ:TSG). The company is best known for its PokerStars and Full Tilt brands.
Poker was one of the hottest sports around just a few years ago, and the games could even be found on several television channels at the same time. The trend has since slowed as new industries like eSports (which just so happens to be one of my favorite mega-trends in the market right now) have come online, but TSG’s recent acquisition of UK-based sports betting operator Sky Betting & Gaming was very well timed with the Supreme Court’s repeal.
The company brought in $1.3 billion in revenue last year, with the majority of that derived from the poker division. If it can work its way to one of the leaders in the U.S. sports gambling industry — which I definitely think is possible — TSG could be poised for huge gains in the years ahead.
Penn National Gaming, Inc (NASDAQ:PENN) also jumped higher this week, and, like TSG, it is another stock that has been an outperformer over the last year. This company owns racetracks and casinos in more than 10 states, so it’s well positioned to benefit as more state governments pass laws that legalize sports betting.
While the recent rally in gambling stocks would suggest that this trend is already off to the races — pun intended — we have to keep in mind that it will actually take years to play out as state legislatures will need to pass new laws before any betting can be done.
Therefore, this initial rally will fade, but now is the time for long-term investors to start thinking about the huge upside here. It certainly could be worth adding a few of these potential winners to your portfolios.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt just launched two new investment advisories focused around the “next” generation investing theme. His trademark three-prong investing approach targets the mega-trends old Wall Street is missing out on. Click here for more information on the “NexGen” Experience.