View from the City: Is the online gaming boom braced for market correction?

Was there ever a better make-hay-whilst-sun-shines opportunity to launch an asset class based on gaming stocks? As the portfolio managers of Roundhill’s Sports Betting & iGaming ETF have joyously discovered (presumably now on holiday in their new Aspen chalet), you could do far worse than pick the first few quarters of the ‘20s to kickstart a gambling fund.

Looking at the most recently released operator data last week, the pandemic gods have been clement in their reckoning towards the gambling industry. At the moment we are mid-way through the seasonal quarterly earnings reports, and most are up both on quarter and (unsurprisingly) on year. Kindred, Entain, Flutter, Kambi and Evolution, all City darlings – both in Europe and across the world – have posted very strong quarterly results, and the short-medium term outlook is rosy too.

The reason? Sportsbook turnover has shown mostly strong resilience assuming you hedged your bets across diverse markets. A strong margin backed by lower-than-expected bonuses has led to high net gaming revenue. Additionally, with some operators there has been an added contribution thanks to a shift in offerings such as low-stake, high-payment accumulators. In other words, mix up the product, point it towards a new (high-spend) demographic and usually good tidings follow.

Some other players have not fared so well. Particularly those with limited-market focus, and especially those in European markets. And this is not surprising, given the start/stop unpredictability of specific European sports events. In 2020 the common market’s sports calendar became a darker version of musical chairs where, depending on where the (viral) music stopped, sportsbook revenue would fall off a cliff. Danske Spil and bet-at-home are specific examples of this, and more will follow in 2021.

That said, an interesting short-term dynamic is developing. While it has always been insiders’ common knowledge to spread sports revenue as much as possible geo-wise, in practice only the larger operators could really get to flex such strong marketing muscles; a B2C brand in a new territory can only go so far before customer acquisition costs start to bite really hard on group profitability. Another (glass half-full) way of looking at this is that the smaller, albeit less liquid, operators stand a better chance of being sold (at higher prices) now to specific buyers under a depth versus breadth narrative.

In fact, over the last fortnight, we’ve sold a couple of other (EU-facing) operators to (US-facing) buyers under this very same narrative. More often than not, it’s better to focus on your (home) strengths as, irrespective of whether revenues are strong or weak, as buyers often wish to acquire territories – and especially proprietary technology stacks – rather than brands, and how better to do it than through a spot of local artisanal shopping? There’s so much demand at the moment that even grey European operators are being snapped up at market-rate multiples, under the assumption that in the medium term most regulators will sober up and release licences in order to claw back (white) tax revenue.

The medium term becomes less clear. What’s for certain is that all these positive YoY and QoQ trends can’t continue upward unabated without some form of market correction. Which likely means a mass consolidation across the medium-large European operators – as what happened with affiliates – or a gradual (private equity-backed) US-style brand sweep across Europe. In other words, more of Caesars, MGM and, (yay) Trump logos coming soon to a TV near you via the Champions League LED signage.

In the meantime, spare a thought for those poor chalet-owner fund managers as they only have a few more positive quarters of growth to look forward to. Now, if only there were more venture capital funds that invested in gaming stocks…