DraftKings is among 14 stocks that stand out among online gambling companies and casinos

By Philip van Doorn

Gambling may already seem to be everywhere, but the rollout of legal online action hasn't happened yet in California, Texas or Florida

We have come a long way from the days when legal gambling, in a state such as New York, was restricted to race tracks and the state's own depressing Off Track Betting locations. Now, with so many casinos dotting the landscape and online gambling platforms becoming important sponsors for major sports leagues, you might think the market is saturated.

But it might not even be close. Taking a broad look at humans' love for gambling, below is a screen of three exchange-traded funds that hold shares of companies involved with online betting or casino operations worldwide. We narrowed down the list to those favored by analysts and expected to grow the most quickly through 2025. The ETFs might be the best way to invest in the gambling space with diversification, but a look at individual stocks may also be of use, as part of your own research.

Online sports betting was legalized in New York in 2022, but it is still technically illegal in California, Texas and Florida, to name a few states.

One of the best-known online sports betting companies is DraftKings Inc. (DKNG), which is emphasizing rapid growth rather than profits. The company isn't expected to turn a full-year profit until 2026, according to estimates among analysts polled by FactSet. For this group of risky stocks, investors' focus is sales growth.

But in his February letter to shareholders, DraftKings CEO Jason Robins wrote that he expected the company to achieve its "first year of positive Adjusted EBITDA in fiscal year 2024."

Jefferies analyst David Katz rates DraftKings a buy, with a price target of $33, which is 58% higher than the stock's closing price of $20.92 on Tuesday. The company is scheduled to report its first-quarter results on May 4 after the close.

"We expect the forthcoming quarterly report should be notably important as the company progresses toward profitability in 4Q23," Katz wrote in a note to clients on Tuesday. That is based on his expectation for a positive number for earnings before interest, taxes, depreciation and amortization (EBITDA). He expects the company to achieve profitability on a GAAP basis, with positive earnings per share, during the second half of 2024.

Katz's long-term thesis for DraftKings is for online sports betting and internet gambling eventually to be legal "across states." His "base case" for the stock includes the market expanding so that legal online sports betting (OSB) some day to be available to 75% of the U.S. population. A near-term catalyst for the shares could be legalization of OSB "in larger states like CA in 2023," he wrote.

His "upside scenario" for DraftKings, with a $60 price target for the stock, includes a rollout of legal OSB in California, Texas and Florida. His "downside scenario" could include the failure for those three states to legalize, or the need for a large capital raise to address the new markets if the three states were to legalize simultaneously (and dilute the shares 20% to 30%). His downside-scenario price target for the stock is $7, which would be a 67% price decline from Tuesday's close.

FanDuel is a well-known competitor to DraftKings and is owned by Flutter Entertainment PLC , which is based in Ireland. In February, Flutter said its board of directors had "reached a preliminary view" that it would be in the company's interest to place a secondary listing of stock in the U.S. A decision on the offering is expected later in April and Katz believes the move "will provide potential upside for several companies within the sports betting industry, most notably DraftKings."

A screen of gambling stocks

For an initial list of stocks involved in various gambling niches, we began by compiling the holdings of three industry-focused ETFs:

Together the funds hold 62 stocks. We narrowed the list to 36 with majority "buy" or equivalent ratings among at least five analysts polled by FactSet. Then we narrowed further to isolate companies expected to increase sales most quickly from 2023 through 2025. We used consensus 2023 sales estimates as a baseline, because China's reopening following years of COVID-19 restrictions makes for much higher sales numbers than those in 2022.

Here are the 14 companies passing the screen that are expected to show doubled-digit (rounding up) compound annual growth rates (CAGR) for sales through 2025:

Company                                 Ticker   Country      Two-year estimated sales CAGR through 2025  April 18 closing price  Consensus price target  Implied 12-month upside potential 
Sands China Ltd.                        HK:1928  China                                             26.0%                    28.1                   34.89                                24% 
Galaxy Entertainment Group Ltd.          HK:27   China                                             25.8%                    55.5                   62.46                                13% 
Melco Resorts & Entertainment Ltd. ADR   MLCO    China                                             21.9%                   13.34                   16.72                                25% 
DraftKings, Inc. Class A                 DKNG    U.S.                                              20.7%                   20.92                   24.08                                15% 
Evolution AB                            SE:EVO   Sweden                                            18.6%                    1381                1,517.27                                10% 
Wynn Macau Ltd.                         HK:1128  China                                             18.5%                    8.58                   10.24                                19% 
Las Vegas Sands Corp.                     LVS    U.S.                                              18.2%                   59.35                   66.37                                12% 
Genius Sports Ltd.                       GENI    U.K.                                              16.8%                    4.42                    7.30                                65% 
Sportradar Group AG Class A              SRAD    Switzerland                                       15.9%                   11.52                   15.76                                37% 
MGM China Holdings Ltd.                 HK:2282  China                                             15.5%                   10.56                   12.72                                20% 
Churchill Downs Inc.                     CHDN    U.S.                                              13.2%                   256.2                  283.86                                11% 
Rush Street Interactive Inc. Class A      RSI    U.S.                                              13.1%                    3.05                    6.73                               120% 
Flutter Entertainment PLC               UK:FLTR  Ireland                                           12.1%                   154.8                  162.40                                 5% 
Genting Singapore Ltd.                  SG:G13   Singapore                                          9.9%                    1.16                    1.14                                -2% 
                                                                                                                                                                            Source: FactSet 

Stock prices and targets are in local currencies.

Click on the tickers for more about each company.

Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.

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-Philip van Doorn

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