The Sports Betting Outlook for 2022
9 minute read · Issue Number 128 · July 8th, 2022
The sports betting sector has been having a rough year, and things are not looking particularly pretty for the companies within.
You may think, “But the house always wins!” And it’s true; statistics and probabilistic models make sports betting a profitable business model.
However, if the costs of running a sports betting company exceed the revenues for an extended period, the so-called ‘house’ will eventually close – it’s not sustainable.
And under the current market conditions, it seems like many sports betting houses are burning down.
Grab some coffee while we look at the market outlook for sports betting in 2022.
The Performance of Sports Betting
Roundhill Sports Betting (BETZ) and VanEck Gaming (BJK) – two of the most popular sports betting ETFs in the stock market – have been falling sharply since the beginning of the year.
BETZ is down 42%, and BJK has fallen 24% – these are more substantial than the ~20% decline from the S&P 500 index. By percentage of holdings, DraftKings (DKNG) is one of the most relevant companies within these ETFs, and it has also lost about 55% of its value YTD.
While the recent decline from these assets can provide an overview of an evident decrease in value – they do not tell us the whole story and certainly won’t explain the reasons behind its downfall.
So what happened, and what could we expect from these assets in the next six months?
The Good: Legislation & Technology
Since the supreme court struck down the PASPA legislation in 2018, 31 states in the US have started offering sports wagering – expanding the addressable market and unlocking further demand. I’d expect the 16 states will soon face tons of pressure to legalize sports betting.
According to Statista, in 2021, sports betting revenue in the US reached $2.1 billion, and this figure is expected to surpass $10 billion by 2028 – a massive 5x increase.
Additionally, the digital revolution has been vital for online sports betting. Companies have established fully immersive digital platforms with features like live betting, automated transactions, media, content, statistics, and information to enhance the customer experience and improve retention.
Great things happen when technological magic meets approved legislation.
The Bad: Profitability and Interest Rates
Due to its novelty and legal recency, companies within this sector are still in the innovation phase – investing in user acquisition, retention, and growth.
Many companies within the sector, such as DraftKings, Genius Sports, and Rush Street Interactive, have struggled primarily due to their lack of profitability – they’re spending more than they’re earning.
Furthermore, the fundamental value of any stock today is equal to the present value of future cash flows discounted using the interest rate (i.e., cost of money).
Rates have been rising lately – and higher interest rates decrease the value of future cash flows. Hence, reducing the forecasts and expectations of the stock’s fundamental value.
The Ugly: Economic Downturn & Consumer Spending
Within the hierarchy of needs of the sports consumer, betting is not considered a fundamental need – it’s a luxury.
Sports betting companies are entertainment providers. Their business and financial performance will rely heavily on a healthy economy under stable market and political conditions.
Furthermore, inflation and unemployment pressure the consumer to recalculate their budget and reallocate their spending based on their priorities.
These reductions in disposable income, combined with an economic recession, which has been a trendy topic discussed in the media – would reduce discretionary consumer spending, lowering overall demand for leisure, entertainment, and wagering.
The Bottom Line
Under the current market conditions, sports betting will have to face the storm with resilience to come out victorious in the end.
The value of sports betting stocks has decreased mainly due to lower expectations for future performance.
However, combining demand generation enablers (legislation) and deflationary tools (through technology) may be enough for these companies to weather the storm.
It’s risky, but the path towards profitability under cloudy conditions in 2022 for online sports betting could make a fascinating comeback story that will set the stage for what the future holds for these companies.
Halftime Snacks podcast episode with Lloyd Danzig – Lloyd manages a VC firm that focuses on sports betting. Listen to learn more about online sports betting, fantasy sports, digital collectibles, and more. Listen here.
Halftime Snacks podcast episode with Adam Bates – Adam leads the investments in sports & entertainment for a venture capital fund that also invests in sports betting companies. He talked more about the outlook for these investments under the current macro environment. Listen here.
🎙 Halftime Snacks Podcast
Doug Holtzman – The Senior Vice President of Sports at Sportsdigita
Doug Holtzman, with over 20 years of experience in sponsorship sales in the NBA, the NFL, the MLB, NCAA, and NBAG, joined the latest snack!
Doug has been working at Sportsdigita for about four years, where he was recently promoted to Senior Vice President (SVP) of Sports.
In this episode, we decode Doug’s craft & expertise in sales – mastering the skills needed, finding mentors, lessons, insights, and main takeaways from failures and tips for starters.
We also discussed ‘storytelling as a service’ – differentiating between good and bad stories, mental models for brands who want to crush their storytelling, and sources of inspiration.
Finally, we learn why Doug works on Sportsdigita, his next steps as the SVP, and how he grows from here.
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