Online Gambling, a Sector to Bet on
The stocks and the outlooks of a promising industry
Online casino and betting stocks have become a popular topic among investors in recent years. With the rapid growth of internet access and the increasing popularity of online gambling, many companies in the online casino industry have seen significant gains. Investing in online casino and betting stocks can be an exciting opportunity due to the industry's potential for growth and the increasing acceptance of online gambling in various parts of the world. However, like any investment, it comes with its own set of risks and considerations.
If you like this sector, here is an article about Evolution
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Various stakeholders in the value chain
Among the different stakeholders in the online gambling value chain, we distinguish five main categories.
Players
Players are the end-users who engage in online gambling activities, making them the core of the value chain. Their participation drives the demand for games and services. They wait for:
Security and Fairness: Ensuring that games are fair and their personal and financial information is secure.
Convenience: Easy access to games, seamless deposits and withdrawals, and a user-friendly interface.
Entertainment: Engaging and high-quality games that provide a satisfying entertainment experience.
Regulators and Licensing Authorities
Regulators and licensing authorities oversee the online gambling industry to ensure it operates within the legal framework, protecting players and maintaining industry standards. Their main functions are:
Licensing: Issuing licenses to operators, ensuring they meet the necessary legal and operational requirements.
Compliance: Monitoring and enforcing compliance with gambling laws, including fair play, responsible gambling practices, and anti-money laundering measures.
Protection: Safeguarding players’ interests by addressing complaints, preventing fraud, and ensuring operators provide a safe environment.
Operators and platform providers
Operators and platform providers manage the online gambling sites and the software that powers them. They are responsible for delivering the gaming experience to players. Their main functions are:
Operations Management: Running the day-to-day operations of the gambling site, including customer service, marketing, and promotions.
Platform Maintenance: Ensuring the platform is stable, secure, and offers a seamless user experience.
Payments: Handling financial transactions, including deposits, withdrawals, and payouts.
Examples: Flutter Entertainment and Betsson.
Game developers and technology Providers
Game developers and technology providers create the games and technological infrastructure necessary for online gambling. Their main functions are:
Game Development: Designing and developing engaging, fair, and high-quality games.
Technology Solutions: Providing the underlying technology, such as gaming engines, random number generators (RNGs), and software platforms.
Innovation: Continuously innovating to enhance the gaming experience with new features, graphics, and game mechanics.
Example: Evolution
Affiliates and marketing partners and acquisition specialists
Affiliates and marketing partners help drive traffic to online gambling sites, playing a critical role in acquiring new players and retaining existing ones. On average, marketing costs account for approximately one-third of their revenues. A part of these costs are for companies specialized in customer acquisition for the online gambling industry. Their TAM (Total Addressable Market) is around 10% of the total online gambling market. Their main functions are:
Promotion: Using websites, blogs, social media, and other channels to promote gambling sites and attract players.
Content Creation: Producing content such as reviews, tutorials, and promotional material to engage potential players.
Performance Marketing: Utilizing data analytics to optimize marketing strategies and improve player acquisition and retention.
Example: Gambling.com
4 distinct gambling categories
The online gambling market can be divided into several distinct categories:
Betting: Representing the largest segment, this category includes traditional sports betting as well as wagers on e-sports events.
Lotteries and Bingo: Typically state-owned, this segment has seen the emergence of international players such as Powerball and EuroJackpot. Some examples of actors: FDJ (Française des Jeux or Jumbo Interactive).
Casinos: This category encompasses virtual slot machines, table games, live dealer games, and more. Furthermore, several brick-and-mortar casinos have started exploring opportunities in the online sector.
Online Poker: Despite a decline in global interest since 2011, when major online poker rooms were shut down in the United States, the market remains robust. Flutter Entertainment is one of the main actor.
The regulation opportunity
Operating in non-regulated markets poses significant risks for online casino operators. The absence of regulatory oversight can lead to a lack of legal protections, making these operators vulnerable to abrupt legal changes and enforcement actions. This uncertainty can result in severe financial penalties, asset seizures, or sudden market exits, which can destabilize the business. Furthermore, non-regulated markets may lack robust frameworks to address issues such as fraud, money laundering, and fair play, increasing the risk of reputational damage.
The unpredictability of regulatory environments in these markets can also deter potential investors and partners, limiting the operator's growth and sustainability. Consequently, while non-regulated markets may offer immediate opportunities, they come with substantial long-term risks that can jeopardize the operator's stability and success.
The poor stock performance of some companies in the sector can be explained by the fact that part of their activity takes place in non-regulated markets. This presents both a risk and an opportunity. Indeed, progressive regulation will create a legal framework that will help business development. However, short-term turbulence is likely to occur.
It is possible that some states will accompany regulation with specific tax rules that could reduce the current financial performance of operators. This will need to be examined on a case-by-case basis.
Geographical breakdown
The main online gambling market is Europe. However Asia and North America are the two most promising markets. LATAM and Africa are also growing quickly.
Zoom on the American market
The US online gambling market is interesting. In 2022, it accounted for 11% of the global online market. In 2028, it should represent 21% of the global market. The 2022-2028 CAGR should be 28% helped by the market legalization in many states.
By 2028, the U.S. online gambling market is projected to reach approximately $50 billion, with a potential target market of around $80B if all states legalize it.
Zoom on the European market
Most of the European market revenues are concentrated in Western Europe, specifically in the UK, France, Spain, Germany, and Italy. The expected CAGR in this region is 7%, which is four times lower than that of the US market.
Global market outlooks
The following sections will focus on global market outlooks. Following that, you'll find an analysis of 25 stocks rated to highlight the most promising ones in this industry.
The global online gambling market was $96B in 2022 and is expected to reach $186B in 2028. This represents a 12% CAGR.
As we observed, regions will grow at different rates, with the most promising being the US, which is expected to achieve a 28% CAGR.
Google trends, a proxy for the operator performance
As with many activities, Google Trends is an interesting tool for identifying business dynamics. In this case, it clearly shows the rapid rise of Betsson in Argentina. This is also evident in the recently published results.
Stock screener and scoring
The screener uses 5 different categories. Each category has different metrics, mainly quantitative. Each metric gives a score depending on thresholds I defined to fit my investment style.
Growth. The growth category uses 4 metrics:
Past and future revenue growth
Past and future EPS growth
Quality. The quality category uses 3 metrics: net profit margin, ROE and cash/debt ratio vs the EBITDA.
Valuation. For valuation, I use 3 metrics: PE, FCF yield and PEG.
Shareholder return. This category shows if the company is shareholder oriented. I look at 3 metrics: dividend yield, dividend growth and buybacks/dilution in outstanding shares.
Market. This is the only qualitative metrics. It represents the value of being present in the market and the company’s strength in it. It is a personal appreciation.
I included Kindred despite the ongoing takeover bid by Française des Jeux for comparison purposes
Be careful, states can sometimes be shareholders in some of these companies, operating national lotteries, for example. This can harm long-term performance if the state encourages politically motivated decision-making rather than focusing on shareholder value.
Conclusion
If regulation, significant competition, and opacity in certain market elements may deter investors, substantial profitability, reasonable valuation and low capital requirements could attract value-oriented investors. The number of players is extremely high (I have selected only 25, but there are hundreds). It is likely that a significant consolidation phase will occur - indeed, this has already begun with the acquisition of Kindred by FDJ, and previously with Evolution's acquisition of NetEnt.
Do you know of an etf that tracks the major firms in that field? Thanks