Why MGM Resorts is a better bet than DraftKings in online gambling

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Jhe online gambling industry has attracted a lot of attention from investors over the past year as betting has opened up to new markets and companies like DraftKings (NASDAQ:DKNG), Rush Street Interactive (NYSE: RSI)and Gold nugget Online games (NASDAQ: GNOG) have go public. The largest is DraftKings, with a market cap of nearly $25 billion, larger than the more established MGM Resorts(NYSE: MGM) Ceiling of $21 billion.

Older gambling companies are trying to keep up, but in many cases it’s the nimble tech upstart that ends up dominating the incumbent. MGM Resorts is trying to reverse this trend with significant and lucrative partnerships. And the strategy may well succeed.

Image source: Getty Images.

Spray and pay

The strategy deployed by MGM Resorts is quite simple. The BetMGM application, which is a partnership with the British firm hearapply for an online sports betting or iGaming license in as many states as possible, and BetMGM partners with as many top companies and celebrities as possible.

The latest deal took the form of a multi-year deal with Audacy, which recently changed its name from Entercom Communicationbringing the app to the forefront for millions of sports radio listeners across the country.

MGM has also partnered with the NBA, MLB, NHL, MLS, NASCAR, and many other sports organizations to attract enough users to make the business viable. The strategy is to pay up front for big name partners and apply that marketing to as many state markets as possible to grow the business. DraftKings has partnered with the NFL, UFC, individual sports teams, and even Turner Sports, but MGM has a broader partnership scope. And his bet is that this will result in longer-term growth.

The argument for DraftKings

On the other hand, DraftKings is a pure online betting game and owns 100% of the business. MGM only owns 50% of BetMGM, limiting its long-term upside.

If MGM doesn’t stay focused on online gambling, it could lose out to smaller, more targeted operators. But right now, it’s a bet that MGM’s name recognition and the massive amount of money and marketing it’s pouring into the company will make it a success. But DraftKings’ more targeted strategy might prove better if customers choose its platform.

In a recent investor presentation, management said customer retention is over 80% and year-over-year revenue retention is over 100% (meaning the remaining users end up making up for lost revenue). income from departing users). And the company has a very recognizable brand, operates in more states than its competitors, and generates more revenue from online gambling than its competitors. So far the strategy is working and the pure-play may end up winning out over bigger brands like MGM Resorts.

MGM is the value game

In 2020, BetMGM generated $178 million in revenue, and management expects that to grow more than 100% in 2021, which would make it over $356 million in annual revenue. DraftKings is even bigger with $643.5 million in revenue last year, but management only expects 48% growth amid its revenue forecast of $900 million to $1 billion. Within a few years, it is possible that the two online gambling operations will generate similar revenues each year.

of a investment perspective, it’s BetMGM’s higher growth rate and MGM’s lower market cap that makes me think MGM Resorts is the best buy. Let’s assume BetMGM’s operations are worth the same as DraftKings today, based on the growth rates and partnerships I’ve highlighted above. MGM’s 50% stake in BetMGM would then be worth $12.3 billion. Investors get all of MGM’s other operations for just $6.5 billion, which is a bargain considering that in 2019 the company’s resorts generated $3.0 billion in adjusted EBITDAR, which is an indicator of resort cash flow. I think that makes MGM Resorts an absolute steal from DraftKings.

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Travis Hoium owns shares of MGM Resorts International. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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