The business lesson of the last two decades has been digital is better, or at least often more profitable.
Think Amazon versus, well, just about anybody who sells anything.
With that shift as the backdrop for 21st century commerce, a handful of gaming-related companies comprised a flurry of new entries into the public investment markets over the last month or so. In the process, some have achieved market cap values that, while mainly aspirational relative to earnings, are also hugely impressive.
Most prominent among the recent three is DraftKings (DKNG) which, while technically not an IPO, comes to the NASDAQ fresh as an acquisition of a previously publicly traded company, Diamond Eagle Acquisition Corp., and folds in tech company SBTech.
The other two newcomers to the public markets are GAN (GAN), a business-to-business provider of gambling software, and ESports Entertainment Group (GAMBL) that specializes in eSports and what it called 18+ gaming.
U.S. Offers ‘Tremendous Market Opportunity’
More could be on the way.
“The driver for all of these companies is that the United States presents tremendous market opportunity, both for sports gambling and iGaming. It is the largest market, by far, in the world,” said Joe Stauff, an analyst with Susquehanna International Group. “So any company that believes it has the ability to offer sports wagering or iGaming would be crazy not to enter the U.S. market.”
Not to be forgotten are the existing players in online gaming which are already established in the European investment marketplace. For instance, Ireland-based Flutter Entertainment, with a large stable of gambling nameplates (FanDuel, Poker Stars, Paddy Power and others), has been publicly traded on the London Stock Exchange, in one form or another, for the last 20 years.
DraftKings, which went public on April 24, offers investors around the world their first real chance to get direct, pure play exposure to the American online gambling market. The appeal is obvious. While the long-term ramifications of the COVID-19 pandemic and changes in public behavior are yet to be fully realized, there’s no question that a digital gambling operation, residing in the sterile realm of cyberspace, doesn’t have to worry about social distancing and sanitizing issues that currently preoccupy brick-and-mortar gambling properties.
Yet, despite that advantage, online gambling operators with big plans require the kind of help the public markets can provide, namely lots of cash.
“For most business-to-consumer online gambling companies, the major costs of mobile marketing, customer acquisition and dealing with legislative and regulatory issues on a state-by-state basis are daunting. It’s actually made for a public offering,” said Jeff Ifrah, an attorney specializing in gaming law and a founder of the iDevelopment and Economic Association, a non-profit that advocates for expansion of online interactive entertainment businesses. “You really can’t scale in this area just using operating profits and revenue.”
Internet Gambling Is Just Getting Started
Internet gambling is really still in its infancy in the U.S. Four states offer online poker; three allow online casino gambling (slots and house-banked table games), and 11 more states permit online sports gambling. There are a handful of states in the wings but it can be slow going, despite the unprecedented wave of interest in the past two years.
Not surprising, online gambling doesn’t generate big profits in the U.S. yet, but nonetheless investors are betting on such companies and that optimism has driven stock prices and market caps.
On May 22, DraftKings was trading close to $29 for a market cap of nearly $9 billion despite reporting substantial losses in its first earnings call May 15. In fact, DraftKings reported total losses of $223.4 million for 2018 and 2019 and a loss of $68.7 million for the first quarter of 2020. On the day it reported the first-quarter results, saw its stock jump about 15%.
In contrast, MGM Resorts International with a fistful of actual brick-and-mortar casinos in the U.S. (nine in Las Vegas alone) and China, had a lower market cap of $7.88 billion as of May 21.
“For investors, a lot of people just want in on sports and that’s what an IPO like DraftKings gives them,” Ifrah said.
In addition, Ifrah said, the public may be confused about the huge numbers attached to sports wagering handle failing to realize that revenues are far lower and bottom-line profit lower still.
Two Other Gaming Companies Made The Move
The other two recent entries to the public markets, GAN and ESports Entertainment Group, are both far different from DraftKings and each other.
GAN is a business to business (B2B) “supplier of internet gambling software-as-a-service solutions predominantly to the U.S. land-based casino industry,” according to its own description. It brings together licensed casinos, content providers, payment processors and others. Its list of partners and customers include the Borgata in Atlantic City, Parx in Pennsylvania, Maryland Live! south of Baltimore, WinStar in Oklahoma, Turning Stone in upstate New York and many others.
Essentially moving from the London Stock Exchange, GAN opened on the NASDAQ Capital Market on May 5 with a price to the public of $8.50. It traded above $15 during May 22 giving it a market cap of about $441 million.
ESports Entertainment Group, also listed on the NASDAQ Capital Market in April, self-describes as an online gambling company focused on, what else, eSports. It offers eSports enthusiasts from around the world the opportunity to wager on those types of events — but not in the U.S. It was trading in the $4 range on May 22 with a market cap of about $36 million.
“There’s no doubt that the future opportunities in the United States is this transition to mobile (participation), whether it’s casino (gaming) or sports betting,” said Sara Slane, a former senior vice president at the American Gaming Association who now runs her own consultancy company, Slane Advisory. “That’s where all the discussion is and where the growth lies. That’s what we’re seeing so far and there’s no reason not to expect the trend to continue.”
Online Gaming Going Mainstream
— Nasdaq (@Nasdaq) April 24, 2020
In the case of DraftKings and other companies, past revenue performance may, on the surface, seem to not support lofty stock prices but those circumstances need to be viewed through the lens of the long game, some experts say.
“The books may not look good at the moment but the prospects may be very bright,” said Thomas Cooke, a distinguished teaching professor at Georgetown University in business law, and who happens to own 35 standardbred race horses.
The current and future effects of the pandemic are in play right now, Cooke said.
“We can’t fault someone who may profit from a certain circumstance,” he noted. “In any situation such as this one, there are going to be winners and losers and people realize where we’re headed (in terms of Internet gambling). … For instance, if I’m running an Internet business no one is going to tell me that I have to close down.”
John Pappas has long been involved in Internet gaming, working with companies, associations and individuals as a consultant and government relations specialist, and now runs Corridor Consulting. For 10 years, he was the executive director of the Poker Players Alliance.
Pappas has seen online gaming go from, in some cases, outlaw outlier to solid corporate citizens as publicly traded companies.
“This is more evidence that (online gaming) is becoming a more mainstream industry that is separate and distinct from the traditional brick-and-mortar industry,” Pappas said. “You have these online gaming brands that are lumped into the gaming world alongside the tradition brands and it will be interesting to see how these various stocks stack up against each other over the next couple of years.
”And in light the pandemic (and beyond), will companies that are focused on Internet-based gaming perform better than companies focused on land-based gaming.”