Sports betting stocks get a boost from NBA, NHL fans: Analyst

Macquarie Analyst Chad Beynon joins Yahoo Finance Live to discuss the performance of gambling companies after major sporting events like the NBA finals.

Video Transcript

- Gambling stocks are trying to rebound today with shares of DraftKings slightly in the green. Caesars somewhat holding up there after bruising sell offs for both names yesterday. With the NBA Finals coming to a dramatic close last night, betting companies are eyeing the Stanley Cup Finals and upcoming World Cup as potential opportunities. Joining us to discuss expectations for the gaming space is Macquarie Analyst Chad Beynon. Chad, always great to get some time with you. So what is that opportunity, and how might these big events shape future earnings for them?

CHAD BEYNON: Thanks for having me on, Brian. Yes, what we've seen during the second quarter, which is seasonally one of the lowest quarters of the year, is some outperformance. That's come on the revenue side with more what we call single game parlays.

So if you watch any of the games during NBA Finals or the NHL, it's more about engaging that customer into looking at player statistics, kind of prop bets versus just kind of the pre match, and that's been really good for customer acquisition and customer engagement. Secondly, the promotions that are being given out to players are coming down from companies, like DraftKings, Caesars, MGM. And I think that'll help the profits, which we're extremely negative in the first quarter and in 2021.

And then looking forward, you know, I think the churn rates have been pretty low. Again, the engagement, the retention of the tech that we're seeing out there has been pretty good, and there haven't been any new companies to come in the space in the past couple of months. So we really like the stocks at these levels. I know everything was down about 20% in the last week, but everything is according to plan. That's what we're hearing from these companies.

- If there are less promos and dollars that are given out as a form of marketing or customer acquisition costs, is that something that can be expected that they can carry on when they try to get and take advantage of new licensing that comes online in more states?

CHAD BEYNON: Yeah, that's a great question. The golden cohort as they call is very important from a lifetime value standpoint. Generally, you look to break even in about a two to three year period with a customer. Now, right now, in the United States, once Maryland and Ohio, which have passed legislation but haven't launched, once those states go live, 46% of Americans will be able to wager on sports betting.

And that doesn't include three out of the big four states, Texas, Florida, and California, which could all legalize in the next couple of years. So I think from an advertising standpoint, companies, like DraftKings, have this scale, where they can start advertising nationally versus locally. But then from a retention standpoint, generally, the rule of thumb is that you still have to give away roughly 20% to that player to keep them engaged and staying loyal, and I think that will start to come down as we get into the NFL season in the third and fourth quarter.

- Chad, I hear what you're saying on these catalysts. I certainly can appreciate them, but on the other side of the coin, we could be nearing a recession. How would these stocks fare during a recession, and how do you think the companies will fare?

CHAD BEYNON: Very good question, obviously, given that this is a highly consumer discretionary sector. During the last downturn, land based gaming in the United States fell peak to trough about 8%. So it was very resilient. What we saw in international markets, like the UK, Australia, Italy, it was very similar in terms of how it held on during the recession.

We don't have that data in the US just because, obviously, sports betting wasn't live during the global financial crisis. What we're seeing right now in the land based side is the back half of May and maybe the first couple of weeks of June, visitation held up. But spend per visit, particularly for that lower end customer, did start to come in a little bit down between 5% and 10%.

The companies believe that the industry will hold up pretty well. Obviously, you'll get growth from some of the new states, but that's certainly something that we're looking at. The average player in a database on a sports betting side loses a little under $1,000 a year, so that certainly is a number that we're going to be looking at as gas prices continue to rise and inflation sets in here.

- Well, if you are seeing some weakening activity, Chad, do the gaming platforms have to bring back those promotions that they have started to now take away?

CHAD BEYNON: I think, if the engagement and the retention tools are working, you don't have to. What we saw in New York, which was probably the most heavily promoted state, early giveaways between $1,000 and $3,000 to acquire that customer, you still have to do odds boost and reload bonuses to keep that player engaged. But it's really some of the tools that they have in the app right now, the single game parlays, sharing your bet slip, betting or fading your friend's bet, so more of that social environment.

But we don't think there will be big promos. As we look into the NFL season, some of the early states, again, like the Maryland, Ohio, maybe New York, again, because that'll be the first full NFL season, you'll start to see that come back. But states that have been in the market for one to three years, we don't expect to see big promos.

- What do you anticipate on the handle for each of these platforms as we head towards and have seen some flashing signs, warning signs of a recession?

CHAD BEYNON: Just in terms of total wagering?

- Sure.

CHAD BEYNON: Yeah, so the fourth quarter was pretty consistent, about $7 to $8 billion per month in the US for handle. That came back a little bit down from those levels and in February, March, and April just because the seasonality of the business. But we're starting to get to that point, where the US can drive roughly $10 billion per handle aggregating all the states together, and I think the big key thing here, right now, you only have about 5% of US citizens engaged in the product.

Getting female customers, getting casual bettors, that's what these companies are really pushing for with some of these fun, more social type of single game parlays. I think that's where you will see engagement go from 5% to maybe 7%, 8%, 9%, 10%. That's what we've seen in countries, like the UK, where in a Premier League Soccer game, you have all types of people focused on the game, betting on the game, not just kind of the die hard gamblers.

- Yeah, I am a casual. I fall into that category. However, I did reload ahead of the US Open golf tournament this weekend. Chad Beynon, who is the Macquarie Analyst, joining us here today. Chad, we appreciate the time as always.