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Sports betting: ‘It’s still early days’ for companies like DraftKings, analyst says

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Oppenheimer Senior Analyst Jed Kelly joins Yahoo Finance Live to discuss the outlook for sports betting, how patient investors must be as more states roll out legalization, and the business model in creating immersive sports betting experiences.

Video Transcript

[MUSIC PLAYING]

EMILY MCCORMICK: Welcome back. Mobile sports betting apps launched in New York just earlier this month. And so far, new Yorkers have placed a staggering $603 million worth of bets. Oppenheimer senior analyst Jed Kelley joins us now for more on the outlook for sports betting. And Jed, when you hear numbers like that for New York, more than $600 million, again, this is a very top line number. And many companies so far have been trying to bring users to their platforms by offering welcome offers and other promotions.

So how sustainable do you think this initial pop in business is going to be for the state and for other newly launched states for sports betting?

JED KELLY: Yeah. Thanks for having me.

New York's following a similar playbook to other states, right? The operators are coming in. They're advertising aggressively, maybe not as much as some other states that we've seen in Arizona because of New York's high tax rate. But that's what you're seeing. And we typically see, for two months, it's usually pretty aggressive. Then it settles down.

You might see some promotional activity around the March Madness and the NCAA basketball tournament. It'll probably trail off then. And then into football season, beginning of football, that's when we would expect the operators to be more aggressive.

I think right now, we're still in an early part of creating a new market. So promotional activity's pretty important. And it's still early days. And we're not seeing a ton of product differentiation yet. But that's where we are right now.

ADAM SHAPIRO: When you talk about the early days of a market, I can think back to 2007. We're talking 15 years ago, having a discussion with a lobbyist in Washington from the gaming industry about national legislation to bring about this market that seems to be getting put together piecemeal, state by state.

As an investor, I don't know if I can afford to wait for the federal government to get involved. But what you just pointed out, I mean, state by state, it seems like we're not there yet. Should we be waiting before putting our toe in?

JED KELLY: Well, I think what you're looking at is the start of a new age of fan interactivity. And I think digital companies like DraftKings and Flutter's FanDuel are going to be leading the fan interactivity, fan engagement. The leagues are fully behind it.

So I think right now, we're in a period where high beta industries like sports betting are out of vogue. But I think you look at DraftKings, their vertical tech stack, what they're building, I think longer-term, yeah, these are compelling platforms that the leagues are behind.

You have to remember, the NFL is now fully engaged in sports betting. They took a pretty big equity investment in Genius Sports. So they're fully behind it. And you look at the growth that we've seen in the UK. We're about 15 years behind them.

We think it could be a huge industry. You also have college kids now that are coming up and not betting through illegal channels, are going to be betting through legalized channels. That'll be another leg of growth. And the leagues realize this is a huge revenue stream for all of them.

EMILY MCCORMICK: Well, growth in terms of revenue, of course, is one thing. But when we take a look at the bottom line results for many of these companies, I mean, "Bloomberg" consensus data is showing no profit for DraftKings until mid to late 2024. What's your outlook on when we should start to see these companies turning a profit here? And are investors just going to have to put up with a lack of profitability until this becomes more widespread?

JED KELLY: Well, I think you have to look at it. I think that's the key, right? Because if California legalizes by 2023, that's the seventh largest economy in the world. There's going to be a lot of spending.

I know if you look at our estimates, we're on the lower end. We have even a loss as out till-- let me think-- I think 2025. So for sports betting, you're creating a new market. There's going to be a lot of investment.

But this gets back to how we view these companies as fan interactivity platforms. And if you watch what's DraftKings trying to build around NFTs, what they potentially could be doing around media, these are higher-margin businesses where they can cross-sell other products into. So I think if they can get into more higher-margin businesses around their cross-selling, that could boost profitability.

But you're going to see continued losses. That's just the environment we're in. We're still early. I think what's going to be key is, you're now almost four years in New Jersey going live with legalized sports betting. And I think when DraftKings, if they have an analyst there on the 4Q earnings, they're going to speak about their profitability in New Jersey.

So if you can start to kind of say, hey, look at these 2018 cohorts, they're starting to turn profitable, that could give investors some comfort. Right now, it's a very challenging market for this type because stocks without any positive cash flows are kind of out of favor right now.

ADAM SHAPIRO: Real quick, you brought up the media component to this. And we've had on David Gantler from fuboTV before. And I believe they have the deal with FanDuel. That seems to be the right model, or what would you like to see that model grow? Because you've got people watching sports on Fubo, but then they can engage with the gaming platform to bet.

JED KELLY: Yeah, I mean, Fubo and FanDuel do not have a deal. I think you're thinking of DraftKings and Dish Network. Fubo's trying to build out their own platform.

But to your point, what you kind of want to see-- if you kind of look at like the bucket of what the fan spends in, they spend sports on media, so their cable subscription, sports betting, ticketing, apparel. Anything where you can kind of create a more immersive experience, where you can actually bring a sportsbook into a user's home, that's a good experience.

I think Fubo is on a right track. They have a multi-view product at Apple TV that's very good. Now, can they develop a sports betting product? That remains to be seen. They've gotten a lot of personnel to get the legal requirement to get the licensing.

But what Fubo's trying to build-- and also DraftKings is trying to look and do the same thing in media if you look at their hires. They're hiring from Verizon. So I think we're going to be eventually where the sportsbooks have some media component where you can stream tier one events. And I do think that's a good strategy.

EMILY MCCORMICK: All right, we'll leave it there for now. Oppenheimer senior analyst Jed Kelly, thank you so much for your time and insight.

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