Key Takeaways
- Despite a strong recent performance, the investment case for online gambling stocks is becoming increasingly complex, caught between the tailwind of US market growth and the headwind of regulatory tightening.
- The recent Illinois tax hike, which could reduce operator EBITDA in the state by over 20%, serves as a critical precedent, signalling a new phase where state governments look to extract more revenue from the sector, compressing long-term margins.
- A clear distinction is emerging between capital-intensive B2C operators like DraftKings and Flutter, who bear the brunt of marketing costs and tax burdens, and the more insulated, high-margin B2B suppliers like Evolution AB.
- Flutter Entertainment’s primary listing on the New York Stock Exchange is a significant strategic move, designed to improve access to US capital and better reflect the growing importance of its FanDuel subsidiary, which is its primary growth engine.
The online gambling sector has recently enjoyed a buoyant period, with key players posting notable gains and appearing to shrug off wider market anxieties. Yet, beneath this surface-level strength, a significant repricing of risk is underway. The narrative is shifting from a simple land-grab in the nascent US market to a more complicated story of maturing growth, regulatory encroachment, and the looming question of sustainable profitability. For investors, the easy bets on market liberalisation may be over; the game is now about discerning which business models can withstand the inevitable squeeze from tax authorities and intense competition.
Performance Amidst Gathering Clouds
On the face of it, recent market activity paints a positive picture. Firms like Flutter Entertainment and DraftKings have benefited from their established footholds in the rapidly expanding US sports betting arena. Evolution AB, the B2B live casino behemoth, has also staged a recovery after a period of significant weakness earlier in the year. However, this rally is occurring against a backdrop of deteriorating conditions that cannot be ignored. The most potent of these is the shifting regulatory landscape, exemplified by the state of Illinois.
In a move that has sent a chill through the industry, Illinois legislators recently replaced their flat 15% tax on sports betting revenue with a progressive system that tops out at 40% for the most successful operators [1]. This is not a trivial adjustment. Analysts project the change could slash DraftKings’ and Flutter’s 2025 EBITDA from their Illinois operations by a considerable margin. The precedent is arguably more damaging than the direct financial hit; other states, having witnessed the sector’s profitability, are now more likely to view operators as a ready source of tax revenue.
A Tale of Two Business Models
The current environment highlights the fundamental differences between the sector’s main players. It is becoming essential to distinguish between the consumer-facing operators and the B2B platform and content suppliers.
| Company | Ticker (Primary) | Business Model | Key Challenge | Key Opportunity |
|---|---|---|---|---|
| Flutter Entertainment | FLUT (NYSE) | B2C Operator (FanDuel, Paddy Power) | Direct exposure to tax hikes & high marketing spend | Dominant US market share via FanDuel |
| DraftKings | DKNG (NASDAQ) | B2C Operator | Intense competition for market share, path to profitability | Strong brand recognition in the US market |
| Evolution AB | EVO (STO) | B2B Supplier (Live Casino, Slots) | Reliance on operator health, scrutiny of grey markets | High-margin, scalable model insulated from direct betting taxes |
Flutter and DraftKings are locked in a costly battle for supremacy in North America. Their model requires immense marketing expenditure to acquire and retain customers, alongside bearing the direct impact of taxes and regulation. Flutter’s recent move to make the New York Stock Exchange its primary listing is a clear strategic acknowledgement that its future is inextricably linked to the US market and its FanDuel brand [2]. The goal is to improve its corporate profile and tap into deeper pools of American capital, a logical step for a company whose US operations are its primary growth driver.
Evolution AB represents a different proposition entirely. As a supplier of the underlying technology and live dealer games to the operators, its fortunes are tied to the overall health of online gambling, but it remains one step removed from the direct line of fire. It does not pay betting taxes, nor does it spend billions on television commercials. Its high-margin, scalable model is compelling, though it carries its own risks, primarily a reliance on the financial wellbeing of its operator clients and historical questions regarding its exposure to unregulated jurisdictions. The stock’s recent rebound from a deep slump suggests some investors are once again appreciating the relative safety of the supplier model in a world of rising operator costs.
The Path Forward: Navigating a Mature Market
The investment calculus for the gambling sector has fundamentally changed. The initial gold rush, driven by wave after wave of US state legalisation, is maturing. The next phase of value creation will be defined not by market entry, but by operational efficiency, brand loyalty, and the ability to generate profit in an environment of escalating costs.
The market’s reaction to the Illinois tax hike was sharp but perhaps not sharp enough, suggesting that the risk of regulatory contagion is not yet fully priced in. Should other large states like New York or New Jersey follow suit, the collective impact on operators’ long-term margin profiles could be severe.
This leads to a speculative but logical hypothesis for the coming 12 to 18 months: we may be on the cusp of a significant valuation divergence within the sector. The market will likely begin to penalise B2C operators that cannot demonstrate a clear and resilient path to profitability, particularly those heavily exposed to states with budgetary shortfalls. In contrast, capital may rotate towards the B2B suppliers like Evolution, which offer a form of “picks and shovels” exposure to the industry’s growth without direct exposure to the taxman. The house, it seems, may still win, but investors will need to be far more discerning about which part of the house they choose to own.
References
[1] crum, N. (2024, June 4). DraftKings Seems More Likely Than Flutter To Add Surcharge After Illinois Tax Hike. *Benzinga*. Retrieved from https://www.benzinga.com/analyst-stock-ratings/analyst-color/24/06/39162125/draftkings-seems-more-likely-than-flutter-to-add-surcharge-after-illinois-tax-hike
[2] Ainvest. (2024). Flutter Entertainment: Capitalizing on Sports Betting Growth and Index Momentum. *Ainvest*. Retrieved from https://ainvest.com/news/flutter-entertainment-capitalizing-sports-betting-growth-index-momentum-240531000sc25/
[3] Yahoo Finance. (2024). *Flutter Entertainment plc (FLUT) Stock Price, News, Quote & History*. Retrieved from https://finance.yahoo.com/quote/FLUT/
[4] Yahoo Finance. (2024). *DraftKings Inc. (DKNG) Stock Price, News, Quote & History*. Retrieved from https://finance.yahoo.com/quote/DKNG/
