iGaming, Sports Betting Promotions Not Easing, Claims Analyst
It was generally thought that with the growth of iGaming and online sports betting sectors, and as analysts and investors sought greater emphasis on profitability, promotional expenditures would become more reasonable. An analyst mentioned that during this time, the degree to which promotional spending has decreased is open to discussion.
In a note to clients today, Deutsche Bank analyst Carlo Santarelli mentioned that although it is true that promotional expenditures as a share of gross gaming revenue (GGR) decreased in the first quarter, this could have been largely influenced by a limited number of new states entering the regulated online sports betting market. State-level launches usually represent a considerable portion of customer acquisition expenses as operators aim to expand their clientele and secure market share during the initial stages.
"For some individual operators, the notion of reducing promotions from an organic/same-store perspective is also correct. However, when looking at data from states that are not freshly launched, we see no evidence of a slowing cadence of promotions overall,” wrote the analyst.
Mobile sportsbook operators are likely investing heavily in attracting and keeping clients in "classic" states like New Jersey and Pennsylvania, among others.
Promotional Spending on Sports Betting Can Impede Profitability
Promotional expenses are, potentially, the large issue in the regulated sports betting arena, as operators must invest to attract and keep customers. However, this frequently sacrifices the achievement of profitability.
In a possible indication of growing competition in the iGaming space, Santarelli noted that in four out of the five states that legalized internet casinos prior to 2021, promotional expenditures increased in those areas.
“While we don’t think the igaming promotional landscape, which we believe has also intensified, is much better than that of the OSB landscape in terms of promotions relative to GGR, and given that the GGR mix is heavily skewed toward OSB, we see a long path to achieving these targets,” added the analyst.
Despite the unexpectedly high promotional spending, certain gaming firms are discovering methods to achieve profitability. Flutter Entertainment's (NYSE: FLUT) FanDuel achieved annual profitability last year, while competitor DraftKings (NASDAQ: DKNG) surprised with a first-quarter earnings per share (EPS) profit based on non-generally accepted accounting principles (non-GAAP).
In a recent report, Goldman Sachs pointed out 21 growth companies that were unprofitable last year but may achieve profitability in 2024. Among the stocks on that list were DraftKings and Rush Street Interactive (NYSE: RSI).
Grip Employed Condemned
In gambling, “hold” denotes the portion of funds that operators keep for every dollar bet. More and more, gaming firms are assessing their internal performance based on expected hold — a figure they probably established themselves. Although Santarelli recognized that hold misses clarify the reasons behind the weakness of some first-quarter results in sports betting, he is not enthusiastic about that approach.
“We understand the rationale and the logic, though we don’t see the investment community warming up to a place where every miss is chalked up to hold that was below a theoretical number provided post the period,” observed the analyst.
He also noted that although sportsbook operators faced some challenges last month because of unfavorable results in the Masters and the NCAA Tournament, the weeks following those events have been beneficial for gaming companies.
