Are UK-listed gambling stocks a long-shot for growth?

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A wide range of factors has resulted in the stock market experiencing its worst start to a year in half a century, with inflation being the common thread running throughout.

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The share prices of the UK’s biggest publicly listed gambling companies have not escaped the damage, with four of the top five by market capitalization down more than a third during the year to date.

 

With inflation running at over 9% in both the UK and the US and the spectre of recession looming, even the most optimistic dip-buyers may be having second thoughts before piling into gambling stocks.

 

If a global recession does take hold, it seems unlikely that UK-listed gambling stocks will recover to the heady heights of 2021 any time soon.

 

Firstly, gambling is not a traditionally ‘recession-proof’ industry; secondly, those 2021 highs were achieved in a period of uniquely high interest in online gambling as a result of lockdown measures seen across the UK and many other leading economies.

 

The cost of entry and capturing market share in the developing US online sports betting market is also hampering the short term growth of many industry players.

 

Take Flutter, for example: While any credible list of the best betting sites in the UK will almost certainly feature Flutter’s megabrands Paddy Power and Betfair, its acquisition of US fantasy sports operator FanDuel in 2018 looked to be the company’s surest bet ahead of the legalisation of online sports betting in numerous US states.

 

However, FanDuel has not yet turned into the cash cow that Flutter hoped it would be. While ratings agency Fitch predicts the US will become Flutter’s largest market in the coming years, it does not expect it to break even until 2024, with further negative EBITDA margins expected if big states like California and Texas go live. Cash outflows in the US market is one of the reasons Fitch recently revised Flutter’s outlook to negative from stable.

 

888 Holdings PLC, another major industry player listed on the London Stock Exchange, is navigating choppy waters of its own. Investment banks acting as underwriters on 888’s acquisition of William Hill’s non-US business have struggled to find buyers for the debt as investors shy away from potentially risky plays in current market conditions.

 

UK-listed gambling stocks clearly aren’t picks for turning a quick profit – but it’s not all doom and gloom.

 

One positive is that experts predict the UK gambling market is set to continue growing at a considerable rate over the next few years, driven by the recent explosive growth of online gambling plus new sports betting verticals like esports bringing in a new demographic of bettors.

 

That growth is of course contingent on macroeconomic conditions as well as the outcome of the long-awaited UK government White Paper on gambling reform. The uncertainty surrounding that document is unwelcome for Flutter et al., but indications up to now suggest resulting policy changes are not set to be as restrictive as the industry once feared.

 

There is also light at the end of the tunnel in the US. Establishing and maintaining a foothold in this market is proving to be – and will continue to be – expensive. However, it’s hard to deny that regulated US sports betting markets hold incredible potential in the next decade and beyond for the big UK-listed firms that have gambled on them.

 

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