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MORGAN STANLEY: Buy these 9 sports-betting stocks ahead of the industry’s expected legalization in 12 states this year and its growth to $10 billion in 2025

Summary List PlacementWith online sports betting being allowed for the first time in Michigan last Friday, the US sports-betting and iGaming industries have stepped further into what Morgan Stanley analysts call a "once-in-a-generation-shift for what was a mature gaming industry." Since the Supreme Court in May 2018 overturned the Professional...

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Summary List Placement

With online sports betting being allowed for the first time in Michigan last Friday, the US sports-betting and iGaming industries have stepped further into what Morgan Stanley analysts call a “once-in-a-generation-shift for what was a mature gaming industry.”

Since the Supreme Court in May 2018 overturned the Professional and Amateur Sports Protection Act, or PASPA — a law that banned sports betting outside of Nevada — 23 states have legalized placing wagers on the outcomes of games. 

The legalization of sports betting is a trend set to continue, with Morgan Stanley analysts led by Thomas Allen estimating that another 12 states could act in 2021. 

In states where sports betting is already legal and live, the momentum has been strong in part due to the coronavirus-induced lockdown.

According to Morgan Stanley, the total US sports-betting handle, which refers to the amount of money wagered by bettors at a sportsbook over a given period, reached $3.6 billion in November 2020, up from $3.3 billion in October and $2.9 billion in September. 

Gross revenues have also grown significantly to more than $300 million in November 2020 from $110 million in November 2019, although “some of the growth was driven by favorable sporting results,” which boosted sports book hold rates to 9% in November last year versus 6% in 2019, Allen said. 

Because of strong recent sports betting trends and legislative tailwinds, Allen and his team have raised their 2025 US sports betting total addressable market forecast from $8.5 billion to $10 billion. The raise is on the basis that 39 states will legalize sports betting, of which 27 will allow online betting by then. 

The team also raised its total addressable market forecast on the iGaming industry to $5 billion in 2025 from $3.5 billion prior, based on the expectations that 11 states will have legalized iGaming and obtained annual revenue of $104  per adult. 

“2020 stood out for revenues outperforming expectations, and 2021 should stand out from incremental states legalizing and the beginning signs of profitability,” Allen said.

As a result of multiple favorable trends driving the online sports-betting market, the team has upgraded DraftKings (DKNG) — “the market share leader, pure-play on US sports betting and online gambling” to overweight. 

But DraftKings is not the only company set to benefit from the positive catalysts and significant growth of the combined industry ahead.

As such, Morgan Stanley rounded up nine stocks ranging from pure-play online betting companies to casino operators and gaming-focused real estate investment trusts.

The stocks, along with their tickers, market caps, price targets, and analyst commentaries are listed below. 

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1. Boyd Gaming Corporation

Ticker: BYD

Market cap: $5.58 billion 

Price Target: $58

Morgan Stanley rating: Overweight

Commentary: “BYD has and should deliver strong flow through given lower industry reinvestment dynamics. BYD appears to have made a good decision partnering with FanDuel to offer sports betting as FanDuel has had dominant market share in legalized states.”

Source: Morgan Stanley

2. DraftKings

Ticker: DKNG

Market cap: $20.51 billion 

Price Target: $60

Morgan Stanley rating: Overweight

Commentary: “We expect legal US sports betting & iGaming to increase from <$1.5B in 2019 to $15B in 2025, with COVID-19 increasing the mkt opportunity as states look for new sources of tax revenue. Forecast DraftKings to maintain top 2 share, 25% in sports betting and 15% in iGaming in 2025.”

Source: Morgan Stanley

3. Gaming and Leisure Properties

Ticker: GLPI

Market cap: $9.48 billion 

Price Target: $42

Morgan Stanley rating: Overweight

Commentary: “Regional casino markets should recover relatively quickly from COVID-19 headwinds. The outlook for tenants’ credit quality will meaningfully improve. GLPI’s 6% dividend yield is higher than most Triple Net REITs, which we believe could differentiate the stock during periods of economic uncertainty.”

Source: Morgan Stanley

4. VICI Properties

Ticker: VICI

Market cap: $14.12 billion 

Price Target: $26

Morgan Stanley rating: Overweight

Commentary: “VICI has the largest, most visible growth pipeline in Gaming REITs, with multiple Right of First Refusal (ROFR) and Put/Call Properties representing attractive growth opportunities. Given VICI’s lack of conflicts and lower cost of capital, it has been the buyer of choice in Gaming. However, there is risk given Blackstone’s recent entrance into the space.”

Source: Morgan Stanley

5. Wynn Resorts

Ticker: WYNN

Market cap: $11.57 billion 

Price Target: $129

Morgan Stanley rating: Overweight

Commentary: “While WYNN’s business is currently severely impaired due to COVID, we don’t see LT structural threats while the mkt appears to be concerned around high-end Macau play. We expect WYNN to outperform expectations in 2H21 once a COVID vaccine is widely disseminated and high-end trends in Macau and Vegas rebound faster than mass.”

Source: Morgan Stanley

6. Caesars Entertainment

Ticker: CZR

Market cap: $16.53 billion 

Price Target: $89

Morgan Stanley rating: Equal-weight

Commentary: “Regional casino markets (60% of mix) were recovering quickly from COVID-19 but new closures/restrictions are a near-term risk. Vegas (40% of mix) will take longer to recover, but CZR has preferable exposure there (lowest convention mix, highest gambler). CZR’s acquisition of William Hill positions it well to capture US sports betting/iGaming market share.”

Source: Morgan Stanley

7. Las Vegas Sands

Ticker: LVS

Market cap: $41.25 billion 

Price Target: $54

Morgan Stanley rating: Equal-weight

Commentary: “LVS continues to be the best positioned for the longer-term Macau China penetration story given its scale of hotel rooms. However, Macau market recovery from COVID-19 headwinds could take time, and regulatory developments could alter mkt dynamics.”

Source: Morgan Stanley

8. MGM Growth Properties

Ticker: MGP

Market cap: $4.10 billion 

Price Target: $31

Morgan Stanley rating: Equal-weight

Commentary: “Strong tenant liquidity / balance sheet. Las Vegas casinos could take time to recover from COVID-19 headwinds, but Regional casinos should recover more quickly. Stable and predictable cash flow generation, with set rent increases.”

Source: Morgan Stanley

9. Penn National Gaming

Ticker: PENN

Market cap: $16.96 billion 

Price Target: $98

Morgan Stanley rating: Equal-weight

Commentary: “We see Regionals / PENN as uniquely positioned to recover to 2019 EBITDAR again in 2021, benefitting from strong expense mgmt. and drive-to demand. We see PENN as one of the best positioned for US sports betting given its partnership with Barstool, strong market access partners, additional skins, and small current market cap vs. the opportunity’s size.”

Source: Morgan Stanley

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