Far are we from the days when neighboring governors and industry analysts predicted Pennsylvania’s online gambling tax rates would be so prohibitive that gambling operators wouldn’t even bother. Pennsylvania is now the nation’s leading iGaming state (in monthly revenue) and consistently among the top five states for sports betting.
In March, PA became the third state, after Nevada and New Jersey, to surpass $1 billion in sports betting handle. And no state has produced more sports gambling taxes ($253.0 million through May 2022). iGaming (online casinos and online poker) have produced even more in revenue and taxes. Through May 2022:
- PA iGaming GGR: $2.58 billion (Second-highest in US)
- PA Sports Betting GGR: $1.06 billion (Third-highest in US)
iGaming companies with both sports betting and online casino verticals appear the best positioned for profitability, impacting long-term stock price potential.
iGaming greater than sports betting, but not in number
While they may not always get the same media and legislative attention, online casinos make more revenue for operators for the state (by a lot) when compared with sports betting.
But the pace of legalization of iGaming is snail-like compared to the torrid pace of online sports betting. Legal sports betting is currently live in 30 states (plus D.C.). Online sports betting is live in 20 states plus D.C., with more launches imminent. Meanwhile, only seven states offer live, legal online casino gambling (online slots and table games).
The higher revenue potential for online casino makes states like Pennsylvania, New Jersey and Michigan (the most-populated iGaming states) desirable destinations for operators. Other winners in this equation are the state (and local entities that benefit from gaming tax revenue) and in-state customers.
Rising tide of PA online gambling
Despite the limited jurisdictions, iGaming revenue is expected to continue on the hot pace it has been on since Covid-19 stay-at-home orders accelerated the industry in March 2020.
According to Eric Ramsey, market analyst for PlayPennsylvania, PA iGaming is tracking more than 33% higher than 2021 through April, putting revenue on pace for $1.7 billion for 2022. And sports betting revenue is on pace for a $560 million year, up 10% YoY so far in 2022.
“Pennsylvania is making a strong case for itself as the most successful iGaming market in the US, and we haven’t seen the top yet. While sports betting revenue is subject to seasonal shifts, the local online casino industry has continued to show steady growth, even in the face of broader economic headwinds.”
In March, PA and NJ became the first states to surpass $140 million in monthly iGaming revenue, which seems to be the new bar.
“Expect online casino revenue to continue to outpace sports betting in this market, and really every other market in which both are legally available. Pennsylvania demonstrates with particular clarity the financial benefits of making casino games available online, including to customers who typically prefer to gamble on sports,” Ramsey said.
PA 2021 GGR breakdown:
- iGaming GGR: $1.3 billion
- Sports betting GGR: $505.5 million
Online casino lifts operator profit
Looking at the entire US market, sports betting revenue will far exceed iGaming revenue in 2025. But that doesn’t tell the whole story of the importance of online casinos on gaming operators’ bottom lines.
According to Morgan Stanley, operators are able to reach break-even quicker in states that have both sports betting and iGaming. That means they can achieve profitability sooner (even despite high tax rates). Top operators including DraftKings, FanDuel and BetMGM are projecting “1-3 year positive payback periods.”
Plenty of short-term investors have deemed these unacceptable timelines, as reflected in recent stock plunges. In stock investing, however, patience is often rewarded in high-growth industries that are still in their infancy.
The same operators are also benefitting from cross-sell from retail sports betting to online sports betting and retail table games. For all of these reasons, higher margins and profitability is expected to improve for many iGaming and online sports betting companies.
As margins rise in the longterm, the big winners in online gambling are likely to see stock prices follow suit. What happens in the short term though is anyone’s guess.
