Investors are repudiating gaming stocks this year, and with first-quarter earnings season looming, online casino and sportsbook stocks could be particularly vulnerable to more downside.
That’s saying something, because the likes of DraftKings (NASDAQ:DKNG), Penn National Gaming (NASDAQ:PENN), and Rush Street Interactive (NYSE:RSI) are among 2022’s worst-performing gaming stocks. However, Roth Capital analyst Edward Engel sees few near-term catalysts to spark this moribund group.
Heading into 1Q22 results we see few catalysts than can push iGaming stocks beyond ‘dead money’ trading ranges, where we expect another quarter of higher revenues but greater losses,” said the analyst in a recent note to clients.
He rates DraftKings and Barstool Sportsbook owner Penn National “neutral,” while grading RSI as a “buy.” Engel said last month RSI could potentially stem losses in the second half of the year as the company moves into markets such as Ontario, Canada and Mexico could pay dividends for investors over the long term.
Seasonal Struggles Loom
Following a 4.77% loss today, DraftKings is lower by 37.39% year-to-date, and that’s just one example of pervasive weakness among iGaming and sports betting equities.
Putting the group’s abysmal 2022 performances into context, those losses were accrued during a period that included the NFL Playoffs, the Super Bowl, a significant chunk of the NBA regular season, as well as the NCAA Tournament. In other words, operators’ stocks are slumping during a prime stretch on the sports wagering calendar.
When the NBA and NHL playoffs wrap up in June, the calendar quickly turns against sportsbook operators, because the only major team sport left in the US is Major League Baseball (MLB), which doesn’t generate nearly the wagering handle as do football and basketball.
“We’re also heading into seasonally slower OSB months, and handle could be reduced further as some operators begin to taper sign-up bonuses,” adds Engel. “Investors are becoming more mindful of long-term EBITDA potential, where they see inconsistency between ongoing promotional intensity and operators’ long-term targets.”
Earnings Season Predictions
Engel says DraftKings is likely to report first-quarter revenue inline with prior guidance, adding that that operator and RSI are candidates to boost 2022 top-line guidance to include recent debuts in Ontario.
He sees a murkier outlook for Penn. One of the leaders of the 2020 rally in gaming equities following the coronavirus broader market bottom in March of that year, the regional casino giant is off almost 64% over the past year.
Penn’s “1Q22 iGaming results should be less messy than peers given Penn’s absense from New York,” notes Engel. “That said, we’re cautious on theScore’s Ontario launch where we see SCR struggling to achieve low-teens OSB share targets against aggressive competition that includes former gray market operators. We’re also becoming more skeptical towards Penn’s 2022-23 iGaming EBITDA targets alongside vertical integration of online sportsbook tech.”
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