Sports betting stocks have slumped in recent weeks thanks to a number of factors, but consumer interest may not be one of them. Industry watchers say there's a good chance that sports betting, which is relatively new in the U.S. and only growing, will be recession proof. Customers can place bets from anywhere, including a mobile device, and more states are legalizing betting in some form thanks to its rising popularity. Chad Beynon, Managing Director and Senior Analyst of the Macquarie Group, joins Closing Bell to discuss why the sports betting sector is in such a unique position. 

Closing Bell

Sports Betting Stocks Are Under Pressure, But is Sector Still Recession Proof?

Welcome back to cheddar news, I'm Michele Castelli oh, sports betting has exploded in popularity in recent months as the states across the US continue to legalize it and some industry analysts are saying it could end up being a recession proof sector as worries about a downturn grow louder. But sports betting stocks themselves aren't having a great summer, broadly shares of companies like MGM Draftkings and caesars, Entertainment and others have slumped double digits joining us now is chad biden, he's the managing director and senior analyst of the Macquarie Group, a global financial services group that provides asset management and other solutions. So chad, we mentioned that over the past month sports betting stocks have been under pressure. What are the biggest headwinds that this sector is facing? Sure, thanks for having me Michel. So the sector is brand new. Um it wasn't around four years ago. If you wanted to place a bet, you either had to go to Las Vegas or Nevada, walking to casino, go to the sports book or the only other alternative was a local underground bookie. So everything became above ground state by state, we've seen legalization. Now, 50% of states have passed a sports betting bill, but it's still a new product and new experience and you know, the consumer is adapting and learning. But to your point, the companies are losing money right now now the reason why they're losing money is they're trying to acquire these customers, we believe will be sticky over a 3 to 5 year period. So companies like Draftkings, caesar's MGM penn Nationals are losing money right now, but we actually think that's going to start to turn and the data that we see from a state by state basis is actually on track or maybe even ahead of schedule from what anyone projected four or 5 years ago. So are you saying that investors should keep an eye on the sector and maybe practice a little patience? I am, you know, this sector because of the high growth nature, we expected to grow 30% per year until 2030 has got caught up caught up in the the growth valuation names, other software names that are unprofitable. So everything has been sold down. Evaluations have come down, but this sector will have, I think there will be a an improvement that will be faster than what we're seeing in other software industries because the biggest costs here are the marketing spend and really just getting the product up and running so the companies can dial back on the marketing. I think we'll start to see that in the next football season all companies expect to be profitable in the fourth quarter of 2023. But again, nothing tells us that this industry is not going to hit any of the targets that we're projecting. We do think there will be, let's say five major winners. So we're recommending that investors look to those, those five players versus some of the other small players that will, that will have more of an up road battle now, do you or your firm only own any of these sports betting stocks. And so I'm assuming if you do, you're not planning to sell anytime soon. We don't, but I've published recommendations and price targets on all the names. The top names that we like within the sector right now are MGM resorts, caesars, Entertainment, penn National and Draftkings, we do think it will be a rising tide lifts all boats here. As you mentioned, the sector has sold off recently. We're starting to see a little bit of an improvement days like today, even even the past week and we think that will continue um you know, as we get into as we get into NFL season now there's an idea floating around among industry analysts that sports betting could be quote recession proof. Do you agree with that idea and what puts this sector in such a unique position? Sure. So I've analyzed the land-based industries for over 15 years. What we saw during the last global financial crisis is peak. To trough land based casinos only fell 8% off of record highs. So that was a relatively recession proof of recession resistant business. This also holds true in the lottery industry. Um lottery sales only fell 6% during that same global financial period from 2008 to 2010. Well sports betting wasn't legal in the United States, what we saw in other countries like the United Kingdom, Italy Australia, some of these more mature markets. It was actually flat during this time period, There was a pre announcement by one of the big um European operators this morning, they've seen a little bit of slippage, so they're saying the same amount of people or even more people are coming back to the online sites um their budget has come down by 3-4% and that's kind of what we're forecasting here. But I do think it is a place where people like to escape, you know, you don't have to go anywhere, you can sit on your couch, you can watch, watch sports and the big thing companies are trying to do right now is get all types of people more casual bettors using the apps, not just kind of the hardcore sports fans now real quick before we go, I want to ask you a little bit about Vegas, people know that as a gambling destination. Do you think that that is recession proof or is this whole idea of, you know, allowing more states to allow sports betting going to dip into that and also added with the recession kind of take away from Sin City's glamour. sure, yeah, so kind of going against some of the stats that we said, the United States only fell 8% from uh I guess local regional gaming revenue standpoint. Las Vegas fell between 15 and 20% and that was because you know, there were other things that play in terms of conventions and weddings and um, you know, get together not going out to las Vegas. Las Vegas is skewed more towards non gaming right now. Um So hotel rooms, nightclubs, day clubs, shows, food and beverage, etcetera. Um at this point it's holding up, but that's certainly something we're keeping an eye on, particularly as flight prices are going up. Um you know, the companies with big exposure out there, MGm and caesars both own about half of the strip. They've done a really good job reducing costs and making sure that if revenues do slip, They'll be able to hold margins in a much better rate than what they did during the 2008 through 2010 period. Well, we'll have to leave it there today. That's thanks to Chad Biden, he's the managing director and senior analyst of the Macquarie Group.