Kelly notes that the sports betting industry has the potential to grow over 30% this year alone, emphasizing that the numbers "speak for themselves." He explains that sports betting is being "widely adopted," with the audience starting to expand to a broader demographic as mobile apps make it easily accessible. Kelly says prominent industry players, such as DraftKings (DKNG), are beginning to demonstrate their ability to achieve profitability by "using the internet to get scale advantages," allowing them to quickly outpace traditional brick-and-mortar betting institutions like casinos.
McTernan states that as sports betting and sports media become "more mainstream," he foresees continued growth in the sector. While some states have yet to fully embrace sports betting, he believes that "over time," widespread adoption will occur, as it is "something consumers want to be able to do." McTernan notes the NCAA game reflects the sports betting industry's focus on catering to consumer demand and expanding the range of sports available for wagering. However, he raised concerns about whether the industry's tactics, such as pre-made parlays, may be "bleeding customers dry".
Joining us now, Jed Kelly, Oppenheimer managing director of equity research, and Bernie Mcternan, a Needham and Company's managing director as well.
Guys, thanks so much for being here. I want to talk big picture, first of all. Because, yes, we hear about these big events that spur a lot of activity. But overall, Jed, let's start with you, talk to us about sports betting adoption in the US and how well these companies are capitalizing on it.
I think you just pointed out the women's tournament, that probably could bring another segment of the population in. It's particularly always been popular among males, call it 25 to 50. I think, now, you're seeing it. It's much easier to get on these apps. 10 years ago, you had to go through ilegal channels and sports is popular.
So the adoption, like we always thought was going to happen, I think now what you're seeing is, you're now seeing these companies prove that they can become profitable and generate sustainable profitability. And that's what we've seen happen with DraftKings, especially over the last 18 months.
- And Bernie, in thinking about the thesis for these companies on adoption across the country, not every state sports betting is legal yet. How much does that play in at this point? Are there states where you make your peace with it? Maybe it will never happen.
But we focus on engagement and this, that, the other state. How do you think about that part of the story because, obviously, go back in time three, four years, that was kind of the whole thing.
BERNIE MCTERNAN: Yeah. No it's a really interesting point. And it's certainly something that we see, the potential for greater right now. About half the country has access to online sports betting. It's much lower for iGaming, only 11% of the country.
Over time, we think it's going to continue to happen. And I think it's what Jen was talking about earlier too, when you start talking about the convergence of sports betting and sports media, it's becoming more mainstream. The cat's out of the bag and this is something that consumers want to be able to do. So we think that over time, it certainly can happen.
Again, whether it's referendum or whatever it may be, it may take a number of years. But there's only about 10% of the country where-- or daily fantasy was explicitly not allowed. And so that's what we view as the upper-end of the potential here for online sports betting.
And then iGaming legislation just has been slower but as states, need more money over time. We think that's another avenue for them to explore to generate those funds.
- And Jed, why has there been such a differentiation in how some of these stocks have traded? Is it because if I look at something like a DraftKings, it's a pure play, online betting. Whereas, if I look at some of the legacy players they still have their bricks and mortar operations.
JED KELLY: Yeah, that's exactly what it is. Your brick and mortars, right, they lease casinos, there's casinos with big leases where DraftKings and FanDuel are here play internet companies that are using the internet to get scaled advantages. And what you've seen is-- you've seen as the states outside Nevada have legalized sports betting, DraftKings and FanDuel continue to consolidate market share and they're essentially judged on different parameters, right.
I think you have MGM Caesars shareholders where they're like, we don't need you to be 25% of the overall market, right. This is a nice add-on where DraftKings and FanDuel, they need to have over 30% market share to work. And you're seeing it now in the products, right.
If you just look at the state handle, look at the state share, their products are now better than any of the land-based guys, and that's what you're seeing.
- And Bernie, we talked at the top about the engagement that we saw around the Women's Final Four, the Women's Championship game that happened yesterday. As you think about that dynamic, is that about bringing more bettors onto these platforms or is it about giving existing bettors more liquidity, essentially, in the market?
There's now a whole series of events that folks were not looking at, now they are. I don't know how much, let's say, the rise of something like F1 plays into this. Is it about-- how does that go for the platforms in thinking about, perhaps, women's basketball ascending as maybe the fifth or sixth most popular sport in the US from its current standpoint?
BERNIE MCTERNAN: Yeah, I think it just speaks to have to give the people what they want. It's to be able to bet on sports or whatever sport that may be. And at the end of the day, that's how we view online sports betting. And we always get the question, because there's a been a big shift for online sports betting, operators really pushing parlay mix and driving their hold higher.
And the question is, well, what point are they going to be bleeding their clients dry? But really, we're not seeing that yet it's because sports bettors want to be able to bet on more things. It's really an entertainment budget that they're focused on.
So as new sports gain in popularity, Netflix drops a new documentary about golf, you have the Masters coming up this weekend. You know, that's really the opportunity where there's, again, like I mentioned before, that convergence of sports betting and sports media. This is really an entertainment budget that we're focused on.
And so it's great when someone like Caitlin Clark pops up. Even though it's more than pop up, she's doing great for four years, but gives people the opportunity to further engage with sports and engage with media through sports betting.
- And you guys both have DraftKings as an outperforming. In fact, you like a lot of the coverage area. But Jed, I want to zero in with one name with you that you like in particular, and that's Genius Sports, which is not one that I was super familiar with but it's more of a data provider, if I've got that right. Why do you like that one?
JED KELLY: Yeah, we like Genius Sports for three reasons. One, we think if you want to play sports betting under a $5 billion market cap, Genius Sports or Sports Radar, the data providers, are going to be your best option.
Number two, because they are a data provider, the sportsbooks can't take the technology in-house. And they have exclusive relationships with their two key leagues, the NFL and the EPL, out until 2028, 2029, so you have good financial predictability.
And then third, all the financial metrics are turning positive this year. They're inflecting to positive free cash flow. EBITDA is going to grow 40%. So we like the data providers here if you're looking for areas under $5 billion that are not going to be impacted by the consolidation that you're seeing flutter in DraftKings do.
- All right, Jed, Bernie, thank you both. We like the Huskies laying the points tonight. Thanks for stopping by.
JED KELLY: Sportsbooks don't.
- Oh, as an alum. As an alum, I've been riding it all tournament.
