There’s been a lot of talk lately that online gambling will be the biggest area of growth for the gambling industry. Shares of DraftKings (NASDAQ:DKNG) and GAN Limited (NASDAQ:GAN) have been steadily growing since reaching the public market. Likewise, Flutter Entertainment (LSE:FLTR) has also had a good run.
Stronger-than-expected online play has driven the rising stock prices, due to gamblers playing online during the pandemic stay-at-home orders. Also, speculation that state budget shortfalls due to the coronavirus shutdowns across the country will further legalize online gambling.
However, despite the hype, the above three companies may not be the biggest winners in the gambling industry, depending on how local gambling laws play out.
How Investing in Online Gambling Works
Gambling has been legalized in the US with many variations, making the industry quite confusing. Some states only allow online sportsbooks, while others also allow online casinos. To complicate matters more, some states require an online casino or sportsbook to be allied with a physical casino or racetrack. If the regulations were wide open in every state, Flutter Entertainment and DraftKings would be the obvious stocks to own. As more states legalize online gambling, DraftKings and Flutter will see revenue growth.
Casinos with a physical presence have a definite advantage in many states, giving them the chance to keep start-ups out of the local market. MGM Resorts (NYSE:MGM) is the best example of this; MGM has partnered with GVC Holdings to launch online casinos and sports betting in every state where it could be legal.
Among the companies offering services to casinos like MGM Resorts is GAN Limited. GAN Limited provides the software to launch an online casino very quickly. Combining a software company with a gambling brand can be a quick way to launch online gambling.
Scientific Games (NASDAQ:SGMS) and IGT (NYSE:IGT) are also in the business of providing platforms casinos can use to launch their own online gambling platforms.
What is obvious is that traditional casino companies are leaning heavily on partners to bring their branded online gambling to life. Knowing that, it’s these software companies that have the most opportunity for growth and are valued highly by the market. However, these are not your typical tech stocks since the market is highly regulated and very competitive. There is no obvious winner-take-all outcome to be seen in the future.
Online Gambling Competition is Fierce
It may be a false assumption that investing in online casinos and sportsbooks will be a guaranteed money maker. States that legalize online gambling often welcome many more online companies than physical casinos, thus watering down the market.
For example, Indiana has seven sports-betting apps, Pennsylvania has 10 online casinos, and there are 22 online casinos operating in New Jersey. This demonstrates that when online gambling and sportsbooks are legalized, competition quickly comes into the market.
Economics 101 tells us that the more competition there is the more companies competition there will be for customers. Online gambling competes by offering bonuses and free games, and even by advertising on radio and TV. If the competition in a market continues to be high, both margins and revenues may be lower than investors expect.
How to Play the Online Gambling Market
It’s possible that there is an advantage to owning stock in physical casinos and then moving online. MGM Resorts has been very aggressive when it comes to entering online gambling through its BetMGM app. MGM continues to add markets, both online and brick-and-mortar. That could be a good choice to win long term.
Compared to other online-only companies, DraftKings has a brand advantage. Furthermore, since it offers its own products, rather than simply being a platform for other brands, it has control of its own future. However, a market cap of nearly $12 billion is high for a company that can only operate in a few markets.
What should concern investors is that only 16 states have any type of legal online gambling, and the market might not open up as fast as investors anticipate. Placing your bet on online-only gambling companies with rich valuations could be a losing bet in the long run.