The holidays are behind us, so is the time to reflect on last year and make some predictions for the coming year. Our prognosis at the start of last year turned out to be too dire, but our view for 2024 is that we essentially see more of the same as 2023. We continue to believe that the online gambling market is evolving from hyper growth phase driven by new state openings and the promise of a bright future towards a more sustainable phase of growth. Where 70%+ growth used to be the norm, it will become the exception in the industry. When industries make this transition, we would expect to see companies and investors more focused on margins, profitability, and cash flows. We believe that this is the beginning of the environment where growth stage businesses will perform best. At the end of the day, great businesses always find a way to win and create material value no matter their stage.
Our Reflections on 2023:
2023 was a much better year for the markets than we anticipated going into the year. There were certainly some victims in our part of the world (e.g. Barstool selling for $1, Gaming Society going under, Unikrn being shuttered, Mojo, etc.), but the market continued to be willing to underwrite certain deals in the online gambling space to dizzying valuation levels. We expected that the froth would leave this market almost entirely given the heavy regulatory burdens, but there are still signs that this market has not yet felt the full effects of gravity setting in. Below we outline a few story lines from 2023 that we think were interesting:
Another Year Another Record for Online Gambling: The global online gambling industry grew to an estimated ~$132B in GGR, representing ~13% y/y growth (source: H2 Gambling Capital; includes grey market betting). The US achieved an estimated 40%+ y/y growth rate (source: IGB; latest available quarterly figure). Even within the US, some of the larger online betting markets like Illinois and Pennsylvania continued to grow at impressive rates, estimated at 50%+ and 20%+, respectively (source: PJT Partners).
Lots of Acquisitions and Limited Growth Capital: This was a banner year for M&A activity with ~$4B in acquisitions executed over the year despite the higher cost of capital. The interest in M&A did not translate to growth/venture funding as there was only ~$96M in venture/growth capital was raised in 2023, a decline of ~70% compared to the prior year (source: Earnings+More). This continues to support our thesis that the growth financing market represents a compelling opportunity that is largely underappreciated / inaccessible to most investors.
Innovation in Gambling = “Grey” Gambling Companies: The fast growth of this industry has led to multiple new types of betting being launched that mimic regulated gambling but use a different set of regulations / laws to govern their business. Our house view is clear on this: We believe that the scope of what constitutes regulated gambling will expand over time and what is on the fringes will ultimately be brought into the regulated gambling sphere. We have been fairly vocal of our view that DFS+ (aka player parlays) should be regulated as if they are sports betting. We don’t care to engage in a long debate on this, but that’s been our general view. This is the first year where a number of state regulators started to draw a clear line and began cracking down on these companies as operating too closely to sports betting. We do not wish harm on any of those companies and hope they all successfully join the transition towards regulated gambling (like our friends at UnderDog have planned the entire time).
Poor Decisions / Management Becomes Exposed: We saw this in a few situations across the year, but poor decisions made during the 2020-2021 hyper growth phase of the industry have begun to have consequences. Companies that were well capitalized just 1-2 years ago burned through their investors’ capital (often with the investors’ required blessing) and found that they generated very little ROI. Now those companies are scrambling to find new capital or a buyer. We do not believe that this is an industry where 50 unicorns will be created in the US, so a blitzkrieg mentality to capital investment is usually a mistake.
Valuations – Lower but Not Fully Rational: In a market where the risk-free rate has increased materially over the year, we would have expected valuations to have fallen rapidly across the board. We saw a lot of companies taking flat rounds after a few years of executing well, which we think is appropriate. However, we were surprised by a few very public deals & their valuations. We think that it will be extremely difficult to make a return on your capital if you are paying north of 10x sales – and we saw a couple at 50x or more.
Things to Watch in 2024:
We believe that the macro backdrop for online gambling in the US and globally will continue to be positive. Online gambling is a secular growth market that we believe will continue to grow rapidly in the US and sustain double digit growth over time globally. Being one of the many people saying “online gambling will grow” is a bit boring at this point, so below we call out some general and specific predictions for 2024.
Expansion of Regulation Continues: DFS+ scrutiny began in 2023 and we believe that it likely spreads to include areas like sweepstakes, skill-based gaming and other regulated betting adjacent industries in 2024 and beyond. Now that the US states have built infrastructure to regulate online gambling in their jurisdictions, we expect that they begin looking at the less regulated adjacencies. While we understand there are great legal justifications for each category, we do not think the regulators will accept “we look just look like gambling, but we use a different set of rules to offer it so you can’t tax it or regulate it closely.” As an example, we understand that there are separate regulations that apply to sweepstakes mechanisms, but we think some states will begin to take a stance of “if it looks like regulated betting to the consumers in our state, then it needs to be regulated as gambling in our state.” This likely represents a short-term speed bump to those businesses, but creates more stability longer-term and allows them to trade at higher multiples once they are regulated.
One unintended consequence of this increased regulation is that investors that invested into an unregulated industry could suddenly find themselves and some of their LPs needing to be licensed as an owner in the regulated gambling industry.
Responsible Gambling Needs More Attention: As evidenced by some press in late 2023, we believe that more attention from operators and regulators alike will be given towards responsible gambling (“RG”) efforts. Thus far in the US market’s evolution, RG has largely been a favorite talking point of the operators, but with limited actions or commitments. We believe this likely changes will multiple businesses positioning themselves to address the market’s future needs. Having invested through the wave of increasing regulations in Europe 5+ years ago, our view is that either the US operators begin regulating themselves / limiting harm – or the regulators will eventually step in with harsher regulations. Our hope is that the companies will increase their focus on RG programs with real commitments. Increasing RG spending is one of those examples where ‘doing good for the world’ will also increase the long-term value of the industry.
Entain is Acquired: We believe that Entain will be acquired this year most likely by MGM or a PE firm. While we appreciate the issues they are/were facing, there is simply too much value left in Entain for it to be left listless. If MGM has aspirations to become a large online casino player globally, then this is their best chance to buy Entain as the shares are cheap and the CEO recently left the company. The shares have massively underperformed and now trade at about 8x EV/EBITDA with the US JV just now reaching breakeven.
DraftKings Goes International: We have been really impressed by DraftKings’ execution in the US in 2023 and the next step in their development will be to enter a new international market. We see the 10-year US opportunity as clear at this point: $50B of NGR x 20%+ market share = $10B of NGR for DKNG x 30% margins = $3B in EBITDA potential. That means DKNG is trading at 5x its 10 years out EBITDA estimate. The best way to grow that market potential and boost its stock will be to plan an entrance in a new greenfield market (LatAm) or a more developed / stagnant market (e.g. Europe or Australia). We personally think entering a more mature and profitable geographic market will generate a more attractive ROI while expanding their market opportunity.
Venture / Growth Mergers: We expect to see a wave of mergers of sub-scale companies in the online gambling space. As companies struggle to access capital without material traction, the companies with traction will become natural buyers. If you put two companies together that are each burning cash and doing $1-2M in revenues, then you can get much closer to breakeven overnight with cost synergies and likely access capital more easily. There are a few sub-industries where this same sort of dynamic is playing out that we are watching closely.
Continued Acquisitions: We expect the elevated level of acquisitions that we saw in 2023 to continue in 2024. Beyond the normal large acquisitions of public companies, we expect to see an uptick in acquisitions of suppliers in the new year. We know that the largest sportsbooks have evaluated acquisitions of suppliers and have balked at valuations. Our guess is that the growth of the target companies and the increased strategic value will make it happen in 2024. We also expect to see more B2B companies (e.g. Aristocrat, L&W) begin making smaller acquisitions of new category suppliers to build out their product offering.
We are excited to keep moving forward in 2024. 2023 was a wonderful year for reconnecting with old friends, building new relationships, and genuinely enjoying what we are doing. We hope for more of that in 2024!