What's Driving The Sell-Off In Online Gaming Stocks?

Shares of online gambling stocks have tanked in the past two months, and Bank of America analyst Shaun Kelley recently took a closer look at the group to try to determine what has gone wrong in the digital gambling market.

MGM Resorts International (NYSE: MGM), Draftkings Inc (NYSE: DKNG) and Flutter Entertainment PLC (OTC: PDYPF) are the three national market share leaders in iGaming, according to Bank of America. In the past month, MGM shares are down 18.7%, Flutter shares are down 20.8% and DraftKings shares are down 34.8%.

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Kelley said the sell-off in online gaming stocks has conceded with a broader sell-off in disruptor and ultra high-growth stocks marketwide.

Bull Case and Bear Case: The good news for online gaming stocks is revenue estimate revisions within the group remain relatively positive for 2022 while many other disruptor stocks have missed expectations or reduced guidance. In addition, the top five operators now control 89% of the U.S. online sports betting market and the top six control 77% of the iGaming market, suggesting the big players are consolidating their power. Finally, the legalization of online gambling in New York and Canada in 2022 should drive revenue growth exceeding the 20% to 25% of many tech peers in 2022, Kelley said.

At the same time, bears would argue that online gambling leaders haven’t generated the level of profits investors had expected up to this point and competition in the market is extremely fierce. Kelley said marketing leverage “remains elusive” in the near-term and consensus net loss expectations for 2022 appear overly optimistic. In addition, revenue growth rates will likely slow from the triple-digit percent range to between 30% and 50% in 2022, and iGaming has little legislative momentum at the moment, Kelley said.

“While stocks are down a lot, long-term ROIs for these businesses remain low enough that the bull-bear debate could rage on for a while,” Kelley said.

How To Play It: Bank of America has the following ratings and price targets for top iGaming and online sports betting stocks:

• MGM: Neutral rating and $55 target.
• DraftKings: Neutral rating and $45 target.
• Penn National Gaming, Inc (NASDAQ: PENN): Buy rating and $75 target.
• Caesars Entertainment Inc (NASDAQ: CZR): Buy rating and $135 target.

Benzinga’s Take: Online gambling stocks may simply be suffering from the same curse of unrealistically high expectations that is dragging down many other high-growth stocks in recent weeks.

The key questions investors will be asking in 2022 is just how much revenue growth will slow in states that have already legalized online gambling and will legalization continue to expand to additional states as well.

Photo: Erik Mclean via Unsplash