Are operators of online sports betting sites due for a rebound in their stock prices in 2023?
With the S&P 500 headed for its worst year since 2008 — down by more than 20% for 2022 as of Wednesday afternoon — and the tech-heavy NASDAQ having fallen by around 10% for the year, it is hardly surprising that major U.S.-based sportsbook operators have seen their share values suffer steep drops over the past 12 months.
The stocks of legal sportsbooks overall have been battered throughout 2022 due to the current inflationary climate that has seen the U.S. Federal Reserve Board raise interest rates, which in turn increases operators' debt servicing costs.
In addition, investors have been worried about the risks of a recession in 2023 — now moderated somewhat in the wake of recent declines in the inflation rate — and impatience over sportsbooks' respective progress toward profitability.
But, assuming that the U.S. economy manages to avert a recession in 2023, Wall Street analysts are projecting sizeable gains in U.S. sportsbook share prices. Furthermore, the launch of legal sports betting in Ohio and Massachusetts in 2023 could give operators a shot in the arm.
Tough sledding in 2022
FanDuel even scored a breakthrough for the online sports betting (OSB) sector when it reported $22 million in positive earnings before interest, taxes, depreciation, and amortization in the second quarter of 2022 for its parent company, becoming the first U.S. sports wagering and online casino gaming operator to report a profitable quarter.
Still, none of the other major online gaming operators — DraftKings, BetMGM, and Caesars Sportsbook — are expected to go into profit until 2023, although Caesars Digital was on track towards profit in Q4.
Of the four leading operators (as measured by gross gaming revenue in figures provided by research firm Eilers & Krejcik Gaming), top-ranked FanDuel (40%) is the only sportsbook whose parent company Flutter has seen its stock price end up almost exactly where it stood at the beginning of the year. Shares of U.K.-based Flutter Entertainment Plc closed at 11,475 GBX on the London Stock Exchange on Tuesday, barely 2% lower than at the start of the year.
Meanwhile, No. 2-ranked (22.2% of U.S. GGR) DraftKings has suffered a whopping 60% plunge in its share price during 2022, and as of noon Tuesday was trading at $11.20. This drop is chiefly due to analysts' growing impatience over its delayed entry into profitability, which is currently projected for the end of 2023.
Improved Q3 results at BetMGM, the digital sports betting arm of MGM Resorts and Europe-based Entain plc, have helped the former rebound from this summer's low of $26.10 to trade at $34.44 as of noon Tuesday. This represents a fall of 24% for the year, a fairly modest drop-off given that the NASDAQ as a whole is down by 16.5%.
Finally, Caesars Entertainment, which rounds out the list of the four leading U.S. sportsbooks with a 9.5% GGR share, has seen the Nevada-based operator's share price tumble to $43.14, a decline of 54% for the year to date.
Analysts see comeback potential
Hope, however, springs eternal.
According to analyst target price forecasts collected by TipRanks, MGM Resorts is now forecast to see its share price improve to the $50 range within the next 12 months. The average price target for MGM Resorts is $50.94 with a high estimate of $67.00 and a low prediction of $37.00. This represents a nearly 50% increase in analyst sentiment from the previous month's average target price forecast of $34.26.
Most analysts were impressed with MGM Resorts' third-quarter earnings report that saw its BetMGM sportsbook arm halve its share of losses to $23.6 million as compared to Q3 2021.
The narrowing of online sports betting losses at BetMGM follows a similar pattern at Caesars mobile sportsbook unit which also reported sharply reduced Q3 losses.
A DK renaissance?
As investors' sentiments have shifted markedly towards an emphasis on earnings rather than market share in 2022, DraftKings has been punished by the market in the wake of high inflation and recessionary fears. However, in an outlook report sent to clients earlier this month, Citi analyst Jason Bazinet argued that DraftKings shares are oversold on a risk/reward basis.
"We remain optimistic and are buyers at current levels," read Bazinet's report. "We continue to view the company’s risk-reward as compelling and maintain our Buy rating and $24 target price."
Should DraftKings shares achieve the Citi target, it would represent a massive 115% gain over its current NASDAQ trading value. But to reach that level, DraftKings will need to post solid Q4 and Q1 2023 results that reflect higher hold rates and overall margins on heavy NFL betting action.
This would go a long way to convincing analysts that the operator has enough earnings momentum to reach its goal of profitability for FY 2023.
In November, DraftKings' Q3 earnings report proved to be a huge disappointment to Wall Street. Despite reducing its quarterly adjusted EBITDA loss by 15.7% to $264.2 million, DraftKings shares plunged nearly 20% on the day and the stock has not recovered since.
But the gaming giant failed to offer any improvement to its profit guidance. Unlike FanDuel, which became the first sportsbook to report a quarterly profit in Q3 2022, DraftKings reiterated its previous forecast that it will only attain profitability in the fourth quarter of 2023 and that it will not reach the full-year break-even inflection point until the close of 2024.
Fit for a king?
Lastly, Caesars Entertainment is on its way to enjoying record results in 2022 if it maintains the momentum shown in its third-quarter earnings report released in November.
Caesars reported record third-quarter adjusted EBITDA earnings of $1 billion in the third quarter of 2022, a 15% year-over-year increase over the $870 million recorded in the same period last year.
Much of the increase was attributed to the sharp improvement in results from Caesars Digital, the division which houses Caesars Sportsbook and online casino, which saw its Q3 revenue soar to $212 million, a whopping 121% year-over-year rise from the $96 million earned in Q3 2021.
Caesars Digital's adjusted Q3 EBITDA losses recorded a significant drop to $38 million, versus a loss of $164 million a year ago and continuous improvement over the $69 million in losses reported in Q2 2022. This was the mobile division's best-ever quarterly performance and put the sportsbook on target to possibly reach profitability in Q4.
Accordingly, a CNN Business survey of 14 analysts offering 12-month price forecasts for Caesars Entertainment has set a median target of $67.50 for its stock, which would represent a very satisfying 60% jump in share value from its current trading price of $43.
