Morgan Stanley predicts the U.S. sports betting industry growing to $12.8 billion by 2025. Pennsylvania would account for $701 million in yearly gross gaming revenue with New York leading all states with $1.7 billion in revenue in 2025. It would represent a massive increase from $400 million in 2018 driven by widespread legalization. In 2021, sports betting revenue was $4.3 billion.
FanDuel (30%) and DraftKings (23%) are expected to be market share leaders in 2025.
iGaming in 2025
Today, iGaming is legal and live in seven states including Pennsylvania and New Jersey. Analysts at Morgan Stanley only believe four more states will join due to “less public and industry support and louder industry opponents.”
Analysts expect the U.S. iGaming market to grow to $7.8 billion in 2025.
Top 4 states in 2025 for iGaming revenue
- Michigan: $1.495 billion
- New Jersey: $1.490 billion
- Pennsylvania: $1.460 billion
- Illinois: $1.336 billion
New York was not included in the report. During the iGaming Next conference last week, State Sen. Joseph Addabbo said:
“iGaming is the next step for New York. It’s not a question of if, but when. Neighboring states are doing it very well.”
What states will lead for sports betting revenue in 2025?
Prior to U.S. Supreme Court’s repeal of the Professional and Amateur Sports Protection Act (PASPA), which banned sports betting outside of Nevada, the American Gaming Association (AGA) estimated that $150 billion per year was bet illegally on sports. The trade group for US casinos suggested it could be a $7.5 to $15 billion per year revenue market at a 5-10% gross win margin.
May 14 marked four years since the repeal of PASPA. Currently, there are 30 states, including Washington D.C., where sports betting is legal. Five more have legalized but are not yet up and running.
Morgan Stanley analysts expect that by 2025, there will be 42 states with legalized sports betting.
Top 5 states in 2025 for sports betting gross gaming revenue
(Texas was not included in report. California is forecasted to be retail only in 2023.)
- New York: $1.7 billion
- Illinois: $852 million
- New Jersey: $784 million
- Florida: $755 million
- Pennsylvania: $701 million
Analysts based their long-term predictions of the US sports betting market on the more mature European and Australian markets. In addition, a survey conducted in 2021 by Morning Consult showed that about 20-25% of Americans wager on sports compared to 45% in the UK.
In line with current trends, most (85%) of the wagering will be done online in the next few years. Since the start of online sports betting in Pennsylvania about 92% of all bets have been placed online.
What is the best sportsbook?
Through research, Morgan Stanley deemed FanDuel Sportsbook the best-in-class for the following four reasons:
- A large tech staff of 4,000 employees
- An early leader in product development
- Greater depth of betting markets
- More competitive odds
Morgan Stanley analysts stated:
“In the US, FanDuel led the development of the Same Game Parlay (SGP) product, which enables wagering on multiple correlated events within a single game for customers, while delivering higher margins for FanDuel. SGPs are very popular among customers with over 50% placing a SGP during the 2020/21 NFL season. With greater market depth, pricing and availability of SGPs, FanDuel saw significant app download market share gains in 1H21, while generating higher gross win percentages vs. competitors.”
Brand awareness and the fight for future market share
Companies that trace their roots to daily fantasy sports are the far-and-away leaders when it comes to brand awareness. FanDuel and DraftKings ranked first for “spontaneous brand awareness” with 54%. Bet365 and BetMGM were a distant third at 11%. Morgan Stanley expects DraftKings and FanDuel (Flutter Entertainment) to remain market share leaders in 2025 with the Top 5 sports maintaining 85% market share.
(chart from Morgan Stanley)
Sports betting and iGaming stock outlook
The “US Sports Betting and Online Gambling Primer 3.0” ended with a look at sports betting and casino stocks.
It noted that sports betting is not different from other high-growth early-stage industries. Amazon and Netflix experienced similar “tricky transitions” from revenue to profits but after quarters where they had significant margin outperformance, they returned 96% in the following year, on average.
Analysts believe that stocks could follow a rebound in performance once sports betting/iGaming operators begin to show profits in early states.
International online gambling/sports betting operators’ EBITDA margins range from 15% to 40%, with Flutter (FanDuel) having the highest margins. Flutter benefitted from a customer acquisition cost advantage by acquiring The Stars Group, which has ~65% online poker market share with PokerStars, then cross-selling into other verticals.
Morgan Stanley forecasts:
- US sports betting/iGaming will deliver ~25% long-term margins
- DraftKings achieving 24% EBITDA margins in 2025, positive but 200-1,200bps below international comps given higher cost of sales and marketing spend as a % of NGR.
- Promotional/marketing spend to normalize over time. It’s already happening in Pennsylvania, where DraftKings is holding the second highest sports betting GGR share while lowering promo spend as a % of revenue.
- DraftKings’ 2025 revenue to be higher than comps.
- Sales and marketing the largest cost, but for scaled players to earn economies of scale over time
- Operators are guiding to 1- to 3-year positive payback periods.
- DraftKings expects positive contribution profits in states 2-3 years after launch and FanDuel 12-24 months after launch.
Interview with analyst on future of sports betting
Wayne Kimmel, managing partner at Conshohocken, PA-based SeventySix Capital welcomed Morgan Stanley analyst Thomas Allen on the Sports Leadership Show. Allen was one of the analysts who contributed to the “US Sports Betting and Online Gambling Primer 3.0.”
There’s a reason “2025” is used to forecast online sports betting and iGaming.
“We value online sports betting completely different than we value brick-and-mortar casinos. With online sports betting and online gambling, given how fast things are growing, we value it on 2025 cash flow.”
The conversations Allen has had with investors in the past 12-18 months now revolve around customer cost acquisition, long-term-player value, and marketing spend. And how soon the companies can be profitable.
“It’s attracted a new crowd of investors. Now I talk to a lot of internet investors, media investors who see it as an attractive growth market.”
Legalization faster and revenue bigger than expected
The 36-minute interview covers an expansive range of topics about sports betting and iGaming. Here are three of PlayPennsylvania’s favorite questions from Kimmel with Allen’s answers.
Has anything surprised you about the rollout of sports betting?
“When we first came out with our estimates of our sports betting in 2018 we thought it would be a $5 billion market. Now we think it will be a $13 billion market. Spend-per-capita is way higher than expected and legalization has been way faster.”
There are rumors of large brands breaking into the industry like Apple, Amazon and Google. How will they play in the future?
“It’s a consideration we have to think about. What we feel good about from our coverage (of gaming) is that this is a highly regulated industry and while the opportunity is very large for the companies we cover, it’s not very large for a $1-$3 trillion dollar company and the regulations are hard. We don’t think those behemoth internet companies are going to come in.”
How do you see physical casinos and gaming and sports betting coming together in the future?
“These things feed off of one another. MGM, Caesars and Penn National have given great metrics behind their omnichannel approach and the benefit of legacy databases. What it’s doing is expanding the TAM. There is some cannibalization of brick-and-mortar revenue when you legalize online casinos. But only seven states have legalized and we only think 11 will. The legalization of sports betting is a much bigger opportunity for these companies.”
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