There was a great penny- (dime? quarter?) dropping moment on a call last week with a major US player who shall remain nameless, for reasons forthcoming.
“We’re happy to be last to market,” they said, of the US sportsbook market. “Let them kill each other over unrealistic CPAs for the next couple of years. We’ve got tons of cash reserves, and we’ll come in when the market’s corrected.”
Which of course seems to be playing out quite prophetically at the moment, or at least has been the case for the last six months. To understand why this is the case, and why the direction of travel will be reversed in the short term, we need to unpick why tech has recently fallen out of love with the market.
Most gambling stocks trade at a higher private equity ratio (typically 60:100) than their FAANG (Tech’s ‘big five’ of Facebook, Apple, Amazon, Netflix and Google) counterparts (20:50). As such, a good portion of them were (justifiably) oversold in the latter part of 2021 and so far in 2022.
However, there will be a short-term correction, and it’s important to understand that it will happen soon. Look at the majority of gambling stocks’ growth curves for the last six months, and observe that most are currently exhibiting a typical inverse head-and-shoulders pattern.
This means that there could be a healthy rebound in prices for the forthcoming quarter, as investors look to capitalise on state legislative fomo.
Sadly, this revival will be short-lived. Despite good expected growth in the upcoming quarters, at some point later this year there will likely be a not-too-unexpected profitability warning from the warring players. This will signal that the expected return on (American, sportsbook) investment will take longer than expected, and pushed to 2024 at this rate.
At this point, most funds would have quickly taken profits, leading to another dark chapter for US-focused gambling stocks. However, the interesting dynamic to be observed here will be the first wave of consolidation in gambling operators.
Expect a few bold moves from some of the larger media players here, keen to take ownership of a cheapish full-stack operator with connections to many prospective states, possibly with a few European assets in tow. Fast-forward a few more quarters, and the media companies have moved in on the sportsbooks, now offering a fully integrated solution adjacent to their programming.
So far, so Barron’s. However, what’s recently becoming clear is that this is not the endgame for the US.
The spirit of yolo
To understand what’s now changed, it’s important to look at where capital was typically concentrated in the previous decade. Pre-2020s, and especially pre-regulation, most liquidity in the US came from old-school private equity players such as CVC and Apollo.
These firms essentially unlocked the abilities for the likes of land-based casinos to buy up online operators and vertically integrate them into a full-stack, full-fat kitchen sink provider. Which works very well in boom season, but when markets contract it becomes very clear which operators are, well, operationally efficient, and which aren’t.
Which leads us to the unnamed US player. Remember them?
For the last few years, there has been a slow but steady growth of the so-called retail investor persona in the US. Brought to popular mainstream culture via WallStreetBets, but essentially raised to icon status through the likes of Robinhood and Lawnmower, the spirit of “Yolo!” has been kept well and truly alive over a large part of a decade thanks to that well-understood and well-managed sentiment in American markets: the day trader.
And these markets know full well the ease of transition between recreational investor to moneyball punter.
Now, while an investment platform might still see a bit of a stretch in converting and upselling a potential gambler, there is another sub-vertical in this category that has a totally different perspective.
Make way for the web3 operator, the fully licensed crypto-exchange, home of shitcoins, NFTs and the all-important tokens, one of which may be tomorrow’s Bitcoin, Ethereum or Solana, but especially launching tomorrow’s sportsbook exchanges, and especially the next generation of crypto-casinos.
Think it’s unlikely? Then you haven’t really been paying attention. Why have crypto-exchanges dominated the Super Bowl, Formula 1 and now even FIFA?
Hint: it’s not for sports fans to exchange tokens during the ad break. These new marketplaces understand that the next generation of gamblers won’t be riding odds off a sportsbook like the previous wave.
They’re busy planning web3-powered exchanges: discord-driven marketplaces where user-harvested tokens provide the real battleground in gambling, creating a new way to generate odds among peers and even speculators. What these actual crypto-books will look like is mostly opaque for now, but we can get occasional hints from the likes of Topspin, Axie and Nitro.
But even before then, their first move will likely be to acquire an existing (online-only) operator, ideally one with a web3 slant, and start to prepare them for the revolution.
Fund managers, relax; this is still a few years out. So, you can keep buying ‘oversold’ gambling stocks well into next year.
But wait until the true cost of acquisition (and state taxes) starts to bite and then watch the great crunch unfold. And when the consolidation phase has begun, there will emerge the next generation of US sportsbooks.
This revolution won’t be televised, it will just be tokenised.