Posted on: March 4, 2022, 12:06h.
Last updated on: March 4, 2022, 02:14h.
Internet casino and sports wagering equities are being walloped this year. But a bottom could be near for iGaming stocks, and there’s a clear way to play a potential rebound, according to one analyst.
In a new note to clients, Roth Capital analyst Edward Engel says that some investors might start nibbling at iGaming stocks following recent punishment directed at the group, and that Rush Street Interactive (NYSE:RSI) is the preferred way to play a resurgence over DraftKings (NASDAQ:DKNG) and Penn National Gaming (NASDAQ:PENN).
Both DKNG and RSI already indicated 2022 EBITDA losses will be materially worse than 2021 (by ~1.5x), thus plenty of negativity is already baked in,” writes Engel. “Meanwhile, most operators are guiding positive EBITDA by YE2023, offering a catalyst some investors want to buy ahead of.”
RSI shares plunged 21.3% on Thursday after the gaming company reported a wider-than-expected fourth-quarter loss while forecasting 2022 revenue of $580 million to $630 million. Analysts were expecting $611.04 million. On the back of that update, several analysts cut price targets on the iGaming name.
Big Time iGaming Opportunity
While RSI shed 50.73 percent of its value on a year-to-date basis, the long-term outlook for iGaming stocks remains compelling.
RSI rival DraftKings confirmed as much at its investor day on Thursday. The company lifted its long-term total addressable market forecast for North American online casinos and sports wagering to $80 billion from $67 billion, with $52 billion of that estimate assigned to iGaming.
Various gaming operators are already noting that online casino patrons spend more and are stickier customers than sports bettors. Additionally, iGaming offers a longer runway for growth because it’s currently live and legal in just a few states, compared to the 30 states and Washington, DC in which sports betting is operational.
Engel, the Roth Capital analyst, believes RSI has some positives that may be going overlooked today.
“We also believe RSI’s market share is outperforming relative to CPAs, where $250 sign-up offers are 75% below peers and contribute to lower promo rates,” said the analyst. “RSI’s iGaming launches on Mexico and Ontario delayed a path to profitability, and investors punished the stock by sending EV/sales to 2x. Yet we don’t believe 2022 EBITDA losses are indicative of lower long-term profitability, and we see potential for EBITDA losses to meaningfully narrow in 2H22.”
Competition Key for iGaming Stocks
With concerns about RSI’s and DraftKings’ timeline to profitability running high in the investment community, a potential wild card for these operators and others is the specter of new, well-heeled rivals entering the space.
That could force promotional spending up, likely weighing on profitability — exactly the opposite of what analysts and investors want to hear.
“Industry leaders believe elevated costs will limit competition, but new entrants continue to launch and several remain on the sidelines. Reports emerged that Apollo is looking to merge Yahoo Sports! with an OSB operator. Fanatics also remains on the sidelines after recently raising $1.5bn at a $27bn valuation,” concludes Engel.