Industry Deep Dive: Sports Betting – 5 years after legalisation in the US, who is winning?

Bryce: [00:00:25] Welcome to another episode of Equity Mates, a podcast where we explore what's possible in the world of investing. My name is Bryce, and if you've just joined us for the first time, a huge welcome. Today we are doing an industry deep dive on sports betting to chat through it, as always is my equity buddy, Ren. How are you? 

Alec: [00:00:47] I'm very good Bryce. Very excited for this Industry Deep dives was something we used to do quite regularly. And then for whatever reason, we stopped doing them. But in the Equity Community survey of the year, there was an overwhelming call to bring them back. And so we're going to do them more regularly, and we're starting with an industry that has only been created, you know, all the time we've been doing Equity Mates. 

Bryce: [00:01:15] What? Sportsbet. 

Alec: [00:01:15] Well, hold on, let's get to that. I was going into a big build up that. 

Bryce: [00:01:21] I already said it is sports betting. 

Alec: [00:01:22] Have you. I wasn't listening. Well, I mean, in the US because we're really focusing on the US today. It was only legalised in 2018. 

Bryce: [00:01:31] So I believe though it's been. Yeah.

Alec: [00:01:34] But we're really focusing on the U.S.. And at the time there was so much hype about it and it was you know, the world's biggest market is legalising all these Aussie companies, all these European companies were trying to, you know, stake their claim. There was so much excitement. And then we sort of don't hear a lot about it unless you really kept your finger on the pulse. A lot of that excitement faded. And so we thought it would be interesting to check in, and say what's happened here. And I think whether or not you're interested in the specific industry, sports betting and whether or not you would invest in it for, you know, ethical reasons. There is a broad and important investing lesson here. And it is that a rising tide does not lift all boats. And we'll get into it. But, I think there's a lot of other investing thematics where there's, like a general thesis that a rising tide is going to lift all boats in the industry. The classic example being AI anything AI adjacent or, you know, anything adjacent to supporting AI, you know, data centres and stuff like that. There's just this general biome, biome at whatever price, because a rising tide is going to lift all boats. This is an example and we'll get into the details, but this is an example that proves that is not always the case. 

Bryce: [00:02:52] Nice. Well, let's get stuck into it. So this is I guess with the context of what has happened in the US with a big focus on the US. So over as Ren said, about five years ago, in 2018, the US Supreme Court changed the law that had banned sports betting as unconstitutional and turned it over to the states to make their own decisions. And so at that point in time, for the previous 25 years, all states other than Nevada had that federal ban on sports betting. But, after that decision, they could decide what course they wanted to take.

Alec: [00:03:30] Yes. Interesting that Nevada Las Vegas didn't get that banned but go anyway. Yeah. So 2018, it's up to the states. That's what the Supreme Court says. The federal government can't regulate sports betting. And so every state can then chart its own course. At this point, 38 states of the 50, as well as Washington, D.C., which is a state, have legalised sports betting. So the majority of states have legalised the three most populous states, Florida, Texas and California are yet to legalise. And so that means that 57% of the US population now has access to legal sportsbooks. 

Bryce: [00:04:12] So does this actually mean if you live in California and you pop across the border, you can bet you can bet. Or is it if you're a if you're if you're a like your state is California your home state. You can't anyway. 

Alec: [00:04:24] No no no. Oh this is the same with almost every law regulated in the territory. 

Bryce: [00:04:30] That's you download the apps and just nip across them. 

Alec: [00:04:32] Yeah, yeah. That's why for 25 years people could go to Vegas and bet legally. So here is the most unsurprising thing of them all in the five years since it has become massive. I would say it's probably and maybe people can think of another example, but in terms of like 0 to 5 years, one of the fastest growing industries we've ever seen. And you could nitpick and say, well, it didn't actually start at zero because there was a massive illegal gambling industry. Sure. But in terms of the legal industry, as we go through these numbers, try and think if there's another one that's grown as quickly. I mean, AI in terms of just market value and stuff, that's not real. That's not revenue is one of them. Goldman Sachs estimates that today it's a $10 billion a year business, and that's $10 billion a year in revenue in the U.S. alone. Because a lot more than $10 billion is bet estimates. This is from the AFR, the Financial Review that this year's Super Bowl in the US alone, more than 23 billion was gambled on the game. 

Bryce: [00:05:49] It's crazy. 

Alec: [00:05:50] It's crazy. 

Bryce: [00:05:51] Yeah. That doesn't even include the world's superpower of betting Australia. 

Alec: [00:05:56] We're gonna we're going to get to some Australian facts that will make us sad. 

Bryce: [00:06:02] I don't want to see them. I know what they're going to be. 

Alec: [00:06:04] Well, how about I give you one? $10 billion in revenue to be specific. 9.6 billion was from another source I found. In the US that works out to be about $29 per person. And that's just like my maths. Divided by 333.3 million people, $29 per person. The US is already the second biggest gambling market in terms of revenue. 9.6 billion. The third biggest is the UK. 4.6 billion. So there's daylight between the second and third. The UK 4.6 billion, based on their population works out to be $69 per person. So that's more than the US is $29 per person. No prizes for guessing who's number one. 

Bryce: [00:06:46] No. Australia. 

Alec: [00:06:47] Australia. And this isn't per capita. This is just straight up bookie revenue. 9.8 billion USD in revenue, which works out to be $377 per person. 

Bryce: [00:06:59] It's ridiculous. We have a gambling problem. 

Alec: [00:07:01] We have a gambling problem. and, whether or not we banned gambling. Well, I'm not, I think, but banned gambling ads.

Bryce: [00:07:10] Yeah, that's a whole another 

Alec: [00:07:11] No one needs gambling ads.

Bryce: [00:07:12] That's a whole nother thing. 

Alec: [00:07:14] Anyway, let's get back to this. So that's the US today, Five years in. Yeah. The second most unsurprising thing is that the growth isn't finished. The growth is potentially in, it's potentially going to only accelerate as things become more normalised and more states legalised. Statista forecast it will be $17 billion by 2029. And Goldman Sachs estimates the market will be worth $45 billion a year when it's mature. Now, they didn't give a year when they estimate it will be mature. But, I sort of inferred from what I was reading that it's like when all states have legalised and, you know, the market sort of fully penetrated or penetrated to the extent that is sort of when a lot of the growth is already there. If that makes sense. So $45 billion a year is where they think it will get to $10 billion a year is where it's at now. So there's a bit of growth to go. 

Bryce: [00:08:09] That's, the sad part about it is that, you know, there's an overwhelming part of the population. Same in Australia that just shouldn't be gambling. Full stop. And they're the ones that are likely to be sucked into this. 

Alec: [00:08:20] Well, let me jump ahead, because here's another fact I wanted to do. I want to do a quick aside about Australia because this is a really sad start. So Michelle Rowland, the minister for communications in the Albanese government, has, said, quote, we know that some 15 to 20% of online wagering is currently done with credit cards. 

Bryce: [00:08:39] Wow. There you go. 

Alec: [00:08:41] And so there, the Albanese government is looking to ban betting and funding betting accounts with credit cards, which is like so good. Do it. 

Bryce: [00:08:55] I just feel like the credit structure in the States, this is just complete, just a finger in the air vibe. But like their credit structure over there seems not less regulated, but a lot more people get in trouble. 

Alec: [00:09:08] Definitely less regulated. 

Bryce: [00:09:09] There you go. Because of the products that are available, 100%. 

Alec: [00:09:13] 100%. Yeah, yeah, yeah, yeah. The idea that up to 1 in 5 bets are being done with a credit card in Australia, like, stop doing that. 

Bryce: [00:09:20] So does that mean the apps you can load your credit card is the main source of payment? 

Alec: [00:09:24] Well, yeah. According to this. Yeah. 

Bryce: [00:09:27] That's not good. 

Alec: [00:09:28] Because also then would you get stung with a cash advance or. It would not just count as a transaction.

Bryce: [00:09:34] Yeah. Yeah yeah I don't know. Anyway

Alec: [00:09:37] Anyway, we're not talking about Australia but passing that law. We will lobby for that law if we need to. Let's go back to the US side because, in the long list of dystopian and depressing facts as we set up this sports betting episode, has this quote from Goldman analyst Noah Naparst quote "the future of sports betting is the convergence of media and sports and betting. You're watching a basketball game in your betting app, and a player is about to take a free throw. The odds that he or she makes it pop up on the screen and the app asks, do you want to make this bet or not? That's where the industry is heading. 

Bryce: [00:10:15] I can see it, but it's not ideal. But it is completely, like 

Alec: [00:10:19] All that I think is like every single set shot for a goal in AFL. They already put up the. They already are. Up the heat map of where they kick in now it's like. 

Bryce: [00:10:29] Yeah X percentage. You know, he's kicked eight times from this position. I can say that I can also say it. But playing out well with Apple pros. 

Alec: [00:10:40] Oh God yeah yeah yeah. So look. 

Bryce: [00:10:44] It's because all these gambling companies also have such ridiculous, like the money that they pay to sports like the AFL. The NRL, like they are just so in the pockets of these companies or these organisations that you can see how that convergence would so easily play out. 

Alec: [00:11:04] Yeah, 100%. We did an episode on the dive last year. I'll include it in the show notes for this episode, where we spoke about the different ways that the sports leagues make money from gambling because there's obviously like, advertising, and some that you'd expect. But the one that surprised everyone, it came out in an Australian Senate inquiry, is that they actually get a cut of the gross wagering on a sport. And so, like, the more money that is bet on the AFL, the more money the AFL get from sports. 

Bryce: [00:11:33] But there is zero incentive for them to ban gambling. 

Alec: [00:11:36] It's the opposite. There's an incentive for them to drive volumes as well. Yeah.

Bryce: [00:11:41] Put on, Mr. Brown, what's his first name?

Alec: [00:11:45] Nathan Brown.

Bryce: [00:11:45] Nathan Brown. Yeah.

Alec: [00:11:46] Follow track. My Brown, if you want to see it's just 

Bryce: [00:11:49] Yeah. Anyway, we saw a track.

Alec: [00:11:52] Yeah. So we'll link that link in the show notes. But I think look, let's pause there and say that's sort of the industry summary. Now, if we get into the companies, there were a lot of Australian companies that had a lot of hope in the early days of really making their mark in the US. I think PointsBet is the one that really comes to mind. They signed that big deal with NBC worth like hundreds of millions of dollars a year in free advertising, and they were going to push into the US. They got, you know, they the I think they do their ads with Shaq and stuff like that. Like they were going hard. And there were a few others that tried to get into the industry as well. So let's take a quick break here. And then on the other side, let's fast forward five years and say today, how have these companies made it? And what is the market structure and investment opportunity look like over in the US? 

Bryce: [00:12:51] Okay. Well I'm just going to have a quick side aside here. I don't I haven't looked at the PointsBet stock. I remembered though it appeared around two bucks. So I'm going to be interested to see where it's gone from there.

Alec: [00:13:03] And it shot up after this NBC announcement. I think it got into the teens. So without having looked at the share price it IPO at around two bucks. Got into the teens. Yeah. On the back of this US news. Just where do you think it is today? 

Bryce: [00:13:23] Well, I know you're winding me up for winding me up for. It's gone down. I probably would have at the top said that it's up because of the nature of what's going on. Yeah, because of the huge kind of money it's pouring in. I want to say it's going to be five bucks. 

Alec: [00:13:40] Okay. After the break, I'll reveal. Nice. Welcome back to Equity Mates. Today we are doing an industry deep dive. We are taking a look at the world of sports betting but particularly the U.S. because five years ago it was left to the States and started to get legalised. And there was a lot of excitement at the time, but we realised that we hadn't really heard a lot about it recently, and so we wanted to check it. And one of the companies that was driving the excitement here in Australia was PointsBet. They signed a massive deal with NBC universal. They were going to make their mark in the US. They ran from $2 to, you know, almost 14, $15 in 2020 and 2021. Before the break, Bryce guessed where they were today. 

Bryce: [00:14:32] I haven't looked at this stock. 

Alec: [00:14:33] You said five bucks. $0.80. 

Bryce: [00:14:38] Wow. So they've more than halved their IPO price. 

Alec: [00:14:42] And this is the takeaway And this was the takeaway that I had, well we'll get into it. but you know this is the classic example. And this is the broadly applicable investing lesson. The rising tide does not lift all boats. It only lifts the best boats.

Bryce: [00:15:01] Obviously just have no market share. 

Alec: [00:15:03] Yes. Well yes. 

Bryce: [00:15:05] That's the crux here. 

Alec: [00:15:06] Well I mean if you want me to give you the answer now, they actually pulled out of the US because they couldn't like it over there. 

Bryce: [00:15:11] Because the money that these companies spend on advertising is ridiculous. 

Alec: [00:15:15] Where we will get to is there's an illusion of choice in this industry, but it is really just a few big, deep-pocketed global players which you can invest in. 

Bryce: [00:15:25] Great. Well, let's have a look at it. So when we're looking at this industry like most industries, we can go down the individual stock route or we can buy some ETFs. So let's start with the individual stocks and the companies that are leading the charge and have some pretty significant market share. And the first one in the later in the space Ren is FanDuel with 43% market share. They're owned by Flutter which is listed on the London Stock Exchange ticker FLTR, which we've spoken about on the show before. 

Alec: [00:15:54] Yeah. And we will certainly speak about it later in this episode. So FanDuel number one and DraftKings number two, 25% of the market. They're listed in their own right on the Nasdaq now FanDuel and DraftKings. This is probably going to test your US sports knowledge. Are you familiar with them?

Bryce: [00:16:14] DraftKings, for some reason, I, like what do you mean? The US sports? 

Alec: [00:16:19] So they weren't sports books originally. They were daily fantasy sites. Yeah.

Bryce: [00:16:25] DraftKings is basketball. 

Alec: [00:16:26] Well, they're all sports. All US sports. But this, you know, this, you know, like NFL fantasy, AFL fantasy where you, like, build a team and then you compete against someone else who's built their team, and it's based on the stats of the players that's out that round. Yeah. So these two companies got a head start in the US because Daily Fantasy was this kind of legal loophole that they were able to slice through. And at first there was no money. But then they started having prizes and you could pay to play. But it was a fantasy. It wasn't betting. And so they sort of built their market share through that. And since this legalisation wave has happened, they've now got the biggest sportsbooks as well with. 

Bryce: [00:17:07] 43% market shares. Ridiculous. So those are the top two. Then there's BetMGM which has 10% market share. They're owned by MGM Resorts, and eight Entain Holdings listed on the London Stock Exchange. And then Caesars is the fourth at 8%, owned by Caesars Entertainment. Nasdaq ticker CZR and then all the other remaining take 14% of the market.

Alec: [00:17:32] So if we just pause on three and four, though, again, there's like a commonality. 

Bryce: [00:17:37] Resorts. 

Alec: [00:17:37] MGM and Caesars. They were casinos and they ran their own sportsbooks in the casinos. And so again, it's like these companies that had Head Start in the US that had some brand recognition in the US and that were adjacent to the sportsbook industry, have been the biggest winners. So FanDuel and DraftKings, one and twoBetMGM and Caesars three and four and then a long tail after that. So I think that's really the starting point for the industry. And that's why companies like PointsBet have found it so hard to cut in. Yeah. Because they have to enter a market, establish themselves, get through the legal regulations and then build a brand. 

Bryce: [00:18:24] Start from zero. 

Alec: [00:18:25] Also side note, because it's a state by state regulatory process, you have to go state by state. And so there's another Aussie betting company BlueBet that is pushing into the US at the moment. And literally they go state by state. They started in Iowa and got approval there. And then they went to Colorado and got approval there. Then Louisiana got approval there. And now they're looking at one other state that I don't have, but like, the lawyers would be busy.

Bryce: [00:18:56] Wow. So those are the main players. As a side note, in Australia, Sportsbet has a dominant 48% market share for online betting. According to the AFR in 2002, which is almost double the market share of the next in line, which is Tab. I would not have put Tab down as the next in line 25%. No, I'm not it. Well, I don't really engage with a lot of these brands, but I would have put it as, what's the what's the other one that's always on to the Sportsbet tab, and, I can't even remember it. It has red in the title. Ladbrokes? Anyway, and surprise, surprise Flutter they own Sportsbet as well. So, I mean, if you're looking at the the global player here, it really seems to be Flutter with ownership of FanDuel and Sportsbet. 

Alec: [00:19:50] Yeah. Here's the spot. Flutter, just from Sportsbet alone made, 2.5 billion aud in 2022. And a profit and operating profit of 750 mil on that. Wow. Pretty good margins in the sports betting game. 

Bryce: [00:20:05] So what about the Aussie company, Ren. 

Alec: [00:20:07] Yeah. So there's a few that have a crack in the US. Yeah. PointsBet. We've spoken about PBH. They decided, that's the ticker PBH. They decided to cut their losses and sell its U.S. assets to a Florida based company. They made about 200 and 300 mil about that. And they basically said, we can't compete. It's too expensive. It's too hard. Tabcorp, they have pushed a little bit into the US through owning 20% of Dabble, which is an Aussie company taking bets in the US. It's a fantasy sports platform that's trying to slide into this legal loophole as well. 

Bryce: [00:20:47] Why bother now though, when it's legal?

Alec: [00:20:49] Well, because if you slide into the fantasy legal loophole, you don't have to get regulated. You don't get state by state. So what's a double let you bet on like the fantasy thing. So you can bet like take the Superbowl. You can't bet on who's going to win the Kansas City Chiefs or the 40 Niners. But you can bet on individual player stock Travis Kelce to get two touchdowns, Patrick Mahomes to score €300 for 300 yards. So that's Tabcorp. That's kind of pushing through that. BetMakers is an Aussie company that provides backend technology, especially for racing. They are powering some bookies over in the US. They've got some big contracts in New Jersey. So they're sort of there. But yeah, they in a different. And then finally Blue Bet who we mentioned. So they're in three states. Oh yeah. Indiana is the next one on the list. So that's going to be the fourth state. They use the brand name ClutchBet over in the US. And they're also looking at offering sportsbooks as a service I guess to white label and expand that way. So I think some of the Aussie companies still try. Good luck. 

Bryce: [00:21:58] Good luck. So to close out individuals you've got some listed in London, you've got Flutter and Entain Holdings, you've got the resorts. You've got MGM Resorts and Caesars Entertainment, who own some of the big players and then obviously the Aussie guys. But if you're looking to really get it, get the the top, the creme de la creme in the US, you're not looking at these Aussie guys. 

Alec: [00:22:21] No, no. Now there are a few ETFs that track sports betting. They are listed in the US because obviously we're talking about the US in this episode. So there's three, VanEck gaming ETF, Roundhill Sports Betting an AI gaming ETF. And then Pacer Blue Star Digital Entertainment ETF. And what we've done is just pulled out the top five holdings for each of them, because you can start to see there's some pretty common names. So the VanEck one, Las Vegas Sands, which is a casino. Flutter, we spoke about DraftKings. We've spoken about Vici Properties, which is the property assets of Caesars Entertainment. And then evolution a b a gaming company. Roundhill, Flutter, DraftKings, Evolution AB, Kindred Group and Entain. 

Bryce: [00:23:13] So pretty similar. 

Alec: [00:23:14] And then finally, Pacer Blue Star Digital Entertainment. I think this ETF's a little bit broader. Tencent top of the list. DraftKings, Evolution AB, Flutter and then the French lottery, La Francaise Des Jeux. So that if I pronounce that right. 

Bryce: [00:23:32] My thing with these ETFs is that it's pretty clear who the winners are at the moment. And I'd probably just be backing in a couple of them. I wouldn't want all the remaining 14% that come in dribs and drabs. 

Alec: [00:23:47] Yeah I agree I think. Where I started with the broad investing lesson is a rising tide doesn't lift all boats. All these thematic ETFs play on that idea. You don't have to pick a winner. The overall category is going to grow. Own the whole category and the rising tide lifts all boats. That hasn't really been the case here. There's been some pretty clear winners that you could have picked, and I'll, we'll close with who I think those have been. But you look at it over and over again, and the same thing plays out like the other classic example in our investing lives. Marijuana. 

Bryce: [00:24:22] Yes. 

Alec: [00:24:23] Marijuana was getting legalised. Everyone was like, a rising tide is going to lift all boats that people were jumping on marijuana ETFs, or just buying marijuana stocks willy nilly. The rising tide, the tide has certainly risen. It did not lift all boats.

Bryce: [00:24:38] Yeah, I think there are a few other things with marijuana. No one really thought. No one really knew where it was going. Like product suppliers, supply chain like. And those ETFs had all of that in there. And it was kind of just a bit of a mishmash when all seems to have all gone up in smoke. 

Alec: [00:24:56] Pun intended. But it just gives me pause when, you know, like we're going to say a whole bunch of AI ETFs come out. You know, I mean, there's a bunch in like, the nuclear space and uranium and all of that. And it's like, nuclear is actually a classic example. I think it's pretty undeniable. Oh, hydrogen is another one. Some of these, some of these clean energy, thematics. I think it's pretty undeniable they're going to play more and more of a role in our energy mix as we decarbonise. Undeniable. But the idea that, like every hydrogen player now or every nuclear plant now is equally going to benefit from that is just not true. And so I think you've just got to be mindful with these thematic ETFs. That is the theme, is it going to broadly drive a rising tide lifts all boats, or is it actually just going to be more money to some of the best players. Because in this instance, as we close out this episode, I think it's undeniable that there has been more money to a few of the best players. In my personal opinion, not investing advice. There's two clear standouts in terms of best players that both London based London listed. It's Flutter and Entain. They and, as I said earlier, there's an illusion of choice in this industry. Here's some of the brands that Flutter owns. FanDuel, the biggest in the US. Sportsbet biggest in Australia. Paddy power is not the biggest in the UK. I think Bet365 is the biggest, but it's right up there. Sky Betting, Betfair Max bet and a whole bunch of other ones that I couldn't be bothered to list. So again, it's like they just have all these different players in all these different markets. Yeah, they're massive. And then Entain, Ladbrokes, coral bet, MGM, Tab New Zealand, Euro bet sporting bet, Bwin, Sts, Bet city, SuperSport the list goes on. It's these like giant gambling conglomerates, one giant sports betting conglomerates that PointsBet said they didn't have the firepower to compete in such a competitive market. Those are the ones that have been out gunning everyone else. 

Bryce: [00:27:09] Well, it's been crazy to see what's happened in the last five years. If what was what was the quote from Goldman that they reckon it'll be a $45 billion industry when it's mature. So almost five times from where it is now. Which is pretty crazy. Hopefully we get some reform though, here in Australia to bring that $377 per person down, because it's certainly not good for society. But, look, that brings us to the end. 

Alec: [00:27:35] It's just, it's just banning. It's like banning ads. 

Bryce: [00:27:38] Good place to start. 

Alec: [00:27:39] Like even if people love punting, why do you need the ads? 

Bryce: [00:27:46] But anyway, if you have an industry that you'd like us to do a deep dive on, hit us up at equitymates.com/contact. As Ren said at the top, this is something we know you guys want to hear more of. So we have some spots across the second half of the year to do more industry deep dives. So we'd love to hear from you. But that brings us to the end of our episode today. If you could write and review on your podcast app as well, we would really appreciate it. But Ren, always good chatting. Stocks will pick it up next episode. 

Alec: [00:28:15] Sounds good.