iGaming Q3 Earnings: Good Fortune Emerging

Posted on: October 9, 2022, 04:23h. 

Last updated on: October 9, 2022, 06:27h.

Todd Shriber @etfgodfather Read More

Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Third-quarter earnings season starts in earnest this week, and while it’ll be awhile before gaming companies step into the earnings confessional, there’s an increasing sense that internet casino operators could deliver positive surprises.

In aggregate, gaming stocks, including iGaming names, are lagging the broader market in dramatic fashion this year. However, some analysts believe the July through September period could mark a turning point for online casino operators. That month saw promotional spending reined in and football hold better than expected.

As Roth Capital analyst Edward Engel pointed out in a recent report, declining handle in New York in recent months is actually a positive for operators, because it implies reduced promotional spending.

With New York’s 51% gross gaming revenue (GGR) tax rate and uncertain path to long-term profitability, we believe surging 1Q22 volumes indicated peak irrationality. Yet more moderate NY handle in recent weeks implies a more rational environment,” he wrote. “We see this leading to higher net gaming revenue (NGR) and narrower 3Q earnings before interest, taxes, depreciation and amortization (EBITDA) losses compared to both Street forecasts and improving buy-side expectations.”

September hold for New York was encouraging, which is relevant to gaming companies and investors alike due to that market’s heft and burdensome taxes on sports betting.

Q3 Catalysts, Growth

In addition to the aforementioned rationalization of promotional expenditures, there was another marquee factor supporting online sportsbook operators. In the third quarter, a slew of underdogs covered spreads and won outright through the first three weeks of the NFL season.

“Underdog wins typically benefit sportsbook operators, and underdog wins have been a big theme this season. Not only did underdogs cover the spread in 56% of Sept’s NFL games, but underdogs beat the favorites in 5/15 games with the widest spreads,” added Engel.

Overall, iGaming and online sports wagering growth for the third quarter is likely to be impressive, according to channel checks and reported data.

“After US OSB & iGaming GGR was +58% YoY in Juy/Aug, we estimate Sept is +79%, which brings our 3Q forecast to +67%. For the first week of NFL season, Geocomply reported geolocation volumes +72% YoY, or +45% excluding NY. Excluding new states, we estimate July/Aug OSB handle was +17% YoY vs iGaming GGR +23%,” noted Engel.

Constructive on DraftKings, RSI

Among the individual names Engel is bullish on into third-quarter prints are DraftKings and Rush Street Interactive. DraftKings’ recent hold and net gaming revenue (NGR) data indicate the company is closing in on reduced losses.

“For Sept alone, we estimate elevated win rates offered a $25M NGR tailwind, which is partially offset by NGR headwinds from KS launching OSB in Sept (we model -$7M),” said Engel in the report. “We increase our 3Q NGR/EBITDA forecast to $440M/-$316M vs the Street’s $430M/-$328M but see room for upside as lower promos/marketing and a lucky July/Aug flow through to the bottom line.”

The analyst noted a more restrained promotional environment is highly pertinent to RSI, because it lowers customer acquisition costs. Engel adds the stock is inexpensive relative to peers.

He rates both DraftKings and RSI “buy.”