It’s the ‘golden age’ of sports betting

Several more states voted to legalize sports betting last week, and the good news for the gambling industry continues: DraftKings and the owner of FanDuel both reported solid results this week thanks to the return of many live sports this summer.

For the first time, bettors could wager on all four major team sports in the third quarter: baseball, basketball, hockey and football. That never happens – and the companies clearly benefited from this coronavirus-fueled quirk in the sports calendar.

Shares of DraftKings popped nearly 5% Friday after the company said sales rose a better than expected 42% for the third quarter. DraftKings also raised its revenue outlook for all of 2020 and issued healthy guidance for 2021.

Meanwhile, shares of Ireland-based FanDuel owner Flutter Entertainment (PDYPF) rallied more than 4% Wednesday after the company, which also owns Paddy Power and Betfair, said its US revenue (which includes FanDuel) soared more than 80% in the third quarter.

Summer was a sports fan’s dream

The months of July, August and September were a bonanza for sports fans – and for gamblers. Many leagues postponed their seasons in the spring and early summer due to the coronavirus pandemic but restarted them in late summer.

Stetson Bennett #13 of the Georgia Bulldogs rushes away from Roman Harrison #30 of the Tennessee Volunteers during the first half at Sanford Stadium on October 10, 2020 in Athens, Georgia.

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So bettors could gamble on baseball, basketball, hockey and football (both pro and college) simultaneously in the third quarter – a one-time calendar anomaly because the NBA and NHL playoffs are usually over by June.

Plus, other big sporting events – like the Kentucky Derby, golf’s PGA and US Open championships and the start of the French Open tennis tournament – also shifted from their usual late spring or early summer times into the third quarter.

“This was a pretty unprecedented, and hopefully a once in a lifetime, quarter. But it sets us up well for the fourth quarter and next year,” said DraftKings CEO Jason Robins in an interview with CNN Business on Friday morning,

DraftKings and FanDuel are the clear leaders in the gambling industry, which has been growing at a rapid clip since the US Supreme Court ruled in 2018 that individual states could legalize sports betting. (Turner Sports, which like CNN is a part of AT&T (T)-owned WarnerMedia, has multi-year sponsorships with both FanDuel and DraftKings.)

DraftKings does business in 12 states, while FanDuel is in 11.

FanDuel CEO Matt King told CNN Business that he’s hoping the company will soon have operations up and running in Michigan and Virginia, which legalized sports betting earlier this year.

King added that FanDuel was generating solid revenue as well even during the pandemic thanks to online poker and other casino games.

“We’re incredibly pleased with how we’re doing,” King said. “The return of sports has meant that there has been an acceleration of growth as opposed to a return to growth.”

Spending a lot to win new customers

But the intense competition comes at a cost to both FanDuel and DraftKings, even if it is one investors seem content to ignore for the time being.

DraftKings posted a quarterly net loss of almost $348 million and FanDuel expects to lose money for the rest of 2020 too. The key reason? Both firms are following the old business mantra that you have to spend money to make money.

DraftKings, for example, shelled out $203 million on sales and marketing in the quarter, compared to total revenue of just $133 million.

“It’s a golden age of online gambling. Customer signups and revenue growth are quite strong,” said Jason Ader, CEO of SpringOwl Asset Management, an investment firm that has a stake in Flutter. “Still, having your marketing expenses exceed revenue doesn’t work forever. It’s a red flag.”

Ader said he’s a bit concerned that the sports betting companies are making the same mistake e-commerce firms and other dot-coms did at the height of the internet bubble 20 years ago. In other words, it’s the Silicon Valley model of spend and build first, worry about profits later.

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Yet both companies may need to step up their advertising and promotional efforts even further in the coming months. While FanDuel and DraftKings might be the Coke and Pepsi of the gambling world now, several other prominent companies are looking to steal market share.

Casino owner Penn National Gaming (PENN) has a big minority stake in Barstool Sports and it just launched a Barstool-branded sports betting app. Gaming giant MGM Resorts (MGM) is also looking to invest more in its own BetMGM app. And MGM now has the backing of influential media investor Barry Diller and his conglomerate IAC (IAC).

However, DraftKings CEO Robins isn’t worried about the glut of new rivals.

“There is new competition coming in from great companies, but that hopefully helps grow the overall market faster,” Robins said.

FanDuel’s King agreed, saying if more states legalize gambling, there will be enough business to go around.

“There will be a continued expansion of sports betting,” King said. “A year ago, we had sportsbooks in three states.”