Editor's Note: Below is a complimentary excerpt from a recent institutional research note written on by our Gaming, Lodging, and Leisure (GLL) analyst Todd Jordan. If you are an institutional investor interested in accessing our research email firstname.lastname@example.org
Punters will be able to place legal bets online on sports and casino games starting tomorrow in Michigan.
Expectations are that Michigan will be a big state for both Online Sports Betting (OSB) and Internet Gaming (iG). For the most part, those expectations are already factored into analysts’ market projections and in their financial models for DraftKings (DKNG), Penn National Gaming (PENN), MGM Resorts (MGM), Caesars Entertainment (CZR), and other publicly traded companies with OSB/iG operations.
So while new markets remain the crux of the bull thesis on OSB/iG operators and especially the pure play, $DKNG, the opening of Michigan is well known and likely already reflected in analysts’ estimates.
We discussed Michigan and other new states in our big $DKNG/OSB/iG presentation and slide deck entitled “$DKNG | THE KING AT A KING’S RANSOM”.
What’s not well known, however, is how the market will play out in terms of marketing/promos and thus, profitability, nor how share will be divided among the many players over time. And this gets to the crux of our negative thesis on $DKNG.
Not only are there too many players, many of whose whole existence is online betting, and will spend whatever it takes to be achieve critical mass and survive, but market shares could differ from existing and more mature markets like New Jersey and Pennsylvania.
The former dynamic should impede and elongate the road to profitability. Regarding the latter, unless $DKNG emerges as the market share leader, Michigan might be viewed negatively by investors and could pressure the stock as a foreshadower of share potential in the many new markets on which investors seem to be banking.
What’s the Hedgeye view, you ask?
Well, just take a look at the operators launching online in Michigan: WynnBet, BetMGM, PointsBet, DKNG, Penn/Barstool, GNOG, FanDuel, BetRivers, William Hill, and FoxBet. That’s a lot of operators, and a lot of potential promotional and marketing spend. Of course, profitability won’t necessarily matter for a while, unless it doesn’t abate.
What will matter is market share, especially for $DKNG who has grown accustomed to a market leading position.
Anything less than #1 or a close #2 may be seen as a disappointment to $DKNG investors. While $DKNG offers a well-known brand and tons of marketing muscle, they could be challenged in MI. Penn/Barstool, BetMGM, and William Hill maintain physical sports books that have been operating since March of 2020 which could give them early mover advantages.
Our wildcard pick for outperformance would be Penn National Gaming/Barstool (PENN).
Barstool should end up being a king in a land of kings – in other words, a critical mass participant, maybe 1 of 3 or 4, and within close proximity to #1, if not actually reaching top dog status.
In addition to its physical presence in Greektown Detroit, Michigan could be considered what we call “Stoolie” country. Barstool is very popular in Michigan (founder Dave Portnoy is University of Michigan Alum) with a large database of potential OSB customers.
Finally, Barstool is running a very interesting initial promotion – the company will match all handle bet this weekend in the form of a donation to the Barstool Fund which helps small businesses impacted by Covid and is already a very popular and well publicized charity. Barstool outperformance would be a nice and positive catalyst for $PENN but also potentially a negative catalyst for $DKNG.