Online Gambling Caught Fire in 2020 – The Motley Fool

If there was one trend that ruled 2020 in the gambling industry, it was a focus on online gambling. The pandemic closed or limited operations for casinos around the world and pushed gambling online. Investors followed suit, bidding stocks with even a whiff of internet gambling exposure higher.

As we look forward to 2021, it's worth looking at which stocks performed well in 2020 and whether they'll keep winning in the future.

Image source: Getty Images.

There are a lot of companies that have exposure to online gambling, but only a few that generate significant revenue in the space. At least for now, that hasn't seemed to matter, because investors are focused on who can grow in the future.

DraftKings (NASDAQ:DKNG) went public this year through a special-purpose acquisition company (SPAC), and it's been a market favorite because it's 100% focused on online betting. But the biggest winner was Penn National Gaming (NASDAQ:PENN), which acquired part of Barstool Sports in an effort to use the brand in its online gambling efforts. Despite barely being operational in the U.S., investors think Barstool and Penn have a bright future in online gambling.

DKNG data by YCharts.

Everi (NYSE:EVRI) and GAN(NASDAQ:GAN) are service providers that have pivoted to online gambling services, including for some of the biggest names in the industry. But Everi's core business is losing money with casinos closed, and GAN's stock trades for a whopping 13 times sales as it tries to build out an online gambling business.

MGM Resorts (NYSE:MGM) and Caesars Entertainment (NASDAQ:CZR) are the legacy companies betting big on sports betting, with MGM expanding a joint venture called BetMGM with online betting company Entain, formerly GVC International. Caesars recently agreed to acquire William Hill, its online gambling partner in the U.S. that will also give it access to Europe.

These companies are worth tens billions of dollars combined but still generate very little revenue from online gambling. For perspective, New Jersey, the country's most mature online gambling market, saw $803 million in bets on sports in October 2020 and for the year has now passed $4 billion in bets. Revenue to sportsbooks was $58.5 million in October, so if the bet-to-revenue ratio holds, all online sportsbooks in New Jersey generated about $291 million in revenue through October. For perspective, New Jersey casinos generated $3.5 billion in gambling revenue in 2019, so sports gambling is still a small business.

There are only 14 states in the U.S. that allow any kind of online gambling, a number that's growing very slowly. Some allow betting on sports while four permit online casinos and five allow online poker. In other words, the market has lots of room to grow, but is as of today it's very limited.

Given the boom in online gambling stocks this year, Wall Street certainly thinks online gambling will be a big part of the industry long-term, even if that projection isn't a reality today. The rate of expansion may tell us a lot about whether these stocks will keep up their performance or disappoint investors.

Speculation drove the online gambling industry in 2020 and in 2021 the rubber hits the road. Physical casinos will likely open fully nationwide, and that could be a headwind if people prefer to bet in casinos. Based on stock prices, it seems that investors are also expecting states to expand online gambling, and that's proven to be more difficult than the industry has thought.

If regulations don't open online gambling in more states and existing markets don't continue to grow, some of these growth stocks could be in for a disappointing year. I can't help but think this is an area where the stock market has gotten ahead of reality, and next year's financial results will tell us whether the bullish or bearish view on the industry is right.

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Online Gambling Caught Fire in 2020 - The Motley Fool