It was an epic weekend on the field for the NFL as many are calling it the best Divisional Round ever. It was also a huge weekend for sports betting. According to GeoComply data gathered by Morgan Stanley, sports betting volumes increased 161% YoY for the NFL Divisional Round. A chunk of that was from New York which launched online sports betting in early January.
Pennsylvania saw betting volume grow 31% YoY and action from the Wild Card Round to the Divisional Round rose 23%.
Geocomply uses pinpoint technology to identify sports app users’ physical location.
Underdogs winning good for books; Sports returning good for all
Thomas Allen, an analyst at Morgan Stanley, expects the US January sports betting handle to grow 54% YoY.
“A likely good weekend for sportsbooks as three underdogs covered/won during Divisional weekend. Bettors generally wager on favorites, which means that underdogs winning typically result in higher hold for sportsbooks. After performing poorly last week, underdogs performed very well in the Divisional round of the playoffs, covering/winning in 3 of the 4 divisional games. Losing Tom Brady and Aaron Rodgers may impact the next few weeks’ betting volumes, though there are still favorites and large city teams involved.”
Regular calendar of sports fuels increase in betting
From Week 1 to the Divisional Round, sports betting volumes in PA increased 46%. A return to a stable sports calendar increased the number of games (198% YoY in November and 86% in December).
Morgan Stanley report on sports betting growthUS Sports Betting_MorganStanley
Morgan Stanley expects DraftKings to be a winner
Morgan Stanley analyst Thomas Allen said that data serves as a reminder that sports betting and iGaming markets will be very large. There will only be a “handful of winners” but Morgan Stanley expects DraftKings to be one of them.
DraftKings upgraded to Overweight by Morgan Stanley
“With sentiment at an all-time low on near-term loss concerns, we see now as a good time to invest for the long-term,” said Allen.
It’s one of the main reasons Morgan Stanley upgraded DraftKings ($DKNG) stock from equal weight to overweight with a price target of $31. The price target implies the stock holds the potential to increase 60%.
Put quite simply, gambling in the US is a profitable business and barriers to entry are lower for online sportsbooks than in-person.
“While we and the market have been focused on near- to medium-term profit concerns, we believe at the current price, one should not ignore that DKNG is a leading market share player in what will be a very large profitable market. At $19, DKNG is trading at just 9x our 2025e EBITDA; using a 15x multiple to reflect what we think will still be a double-digit EBITDA grower post-2025, get to a $31 price target, implying ~60% upside.”
Other key figures
- The implied market revenue rate $1.9 billion is above Morgan Stanley’s prior $600 million 2022 forecast and $1 billion 2025 forecast.
- While only 4 operators were live in the first 8 days of the NY market, it still showed how the leading players dominate, with DraftKings, FanDuel and Caesars at 98% and 99% of handle.
- Currently, in every state that releases market share data, the top 5 operators have at least 82% combined share.
- Although there is plenty of talk around sports betting commercials and levels of marketing spend, it has driven a very concentrated market that only players of scale can really compete in.
DraftKings PA market share and promotional spend
DraftKings is the No.2 sports betting app in PA in terms of handle and revenue. Of the state’s 13 online sportsbooks it has a 24.7% share of all bets placed online. FanDuel has maintained the top spot and in 2021 they had a 35.2% market share
Morgan Stanley pointed out in their report that DraftKings has been able to rationalize promotional spending in Pennsylvania better than competitors while maintaining share.
“DraftKings was formed in 2012 as a US Daily Fantasy Sports company and has generally not been profitable or gained overseas experience, unlike Entain (BetMGM) or Flutter (FanDuel). As a result, investors believe that DKNG doesn’t have the same tools to transition from revenue to profits. However, Pennsylvania is the only example of a state where we have less than 2 years of revenue and promotional spending data, and is a potential example of DKNG shifting to a more rational promotional spend better than peers.”
In Nov./Dec. 2019, when DraftKings launched its online sportsbook, they spent 48% of gross revenue on promotions, well above the market’s 31% the report says. In 2020, DKNG again spent a higher promo percentage at 39% vs. the market average of 30%.
But, in 2021, DraftKings lowered its promotional spend to 27% of revenue, despite the market increasing its spend to 33% and DKNG was able to maintain 18% market share, the second-highest in the market.
State-by-state build-up of marketing spend and gross profit margins suggest DraftKings should start to see lower losses in 2023 than 2022.
DraftKings Morgan Stanley Analysis (Jan. 2022)DKNG Jan 2022'
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