Following a now lengthy bloodletting among sports betting equities, some names in the group are attractively valued. That factor may not be fully appreciated due to the risk-off sentiment currently permeating financial markets.
That’s the opinion of CBRE analyst John DeCree, who, in a note to clients today, acknowledges that while there’s lingering uncertainty, the sell-off endured by sports wagering stocks may be too deep.
While we appreciate the uncertainty of both inflation and rising rates, we believe valuation of most US sports betting businesses overcorrected,” said DeCree.
The Roundhill Sports Betting & iGaming ETF (NYSEARCA:BETZ), which is the benchmark among sports betting-focused equity funds, is down 17.68 percent year-to-date. That exchange-traded fund is home to DraftKings (NASDAQ:DKNG), Entain Plc (OTC:GMVHY), and Penn National Gaming (NASDAQ:PENN), among others.
DraftKings Remains Measuring Stick
As the only large cap pure-play in the iGaming/sport betting equity arena, DraftKings remains the de facto barometer for the health of the group.
These days, that’s not necessarily a positive, as the stock is under siege from critics and short sellers. Even with the benefit of a 20.33% gain over the past week, the stock is down 29.34% year-to-date, and more than 72% over the past year, as analysts and investors ponder what’s becoming an increasingly long road to profitability.
However, CBRE’s DeCree notes DraftKings is trading at a reasonable 3.2x estimated 2023 revenue. As for more diversified gaming entities, including Caesars Entertainment (NASDAQ:CZR), Entain, Flutter Entertainment (OTC:PDYPY), MGM Resorts International (NYSE:MGM), and Penn National, the analyst says multiples are low and shouldn’t be measure against other high-growth industries for at least two reasons.
“First, gaming companies are very profitable, with substantial free cash flow, which should make the equities less susceptible to rising interest rates relative to unprofitable growth companies,” he said. “Second, US online sports betting/iGaming is an entirely new industry with years of growth ahead, unlike other tech sectors that benefited primarily from stay-at-home orders during the pandemic, and are now normalizing.”
FanDuel Looms Large, Too
FanDuel is the biggest online sportsbook operator in the US. But it looms large in the sports betting equity conversation for another reason.
It’s believed that as the industry stabilizes and legal issues with Fox Corp. (NASDAQ:FOXA) are put to rest, parent Flutter will spin-off FanDuel in the back of 2022, potentially providing a valuation spark for other sports wagering equities.
In a note out earlier this month, DeCree reiterated a “buy” rating on Flutter, pointing out that FanDuel should command a higher valuation than rival DraftKings.
“We believe FanDuel should trade at a premium, given its leading market share, clearer path to profitability, and ability to self-fund growth,” according to the analyst.