Deutsche Bank rated the prospects as low for igaming and online sports betting expansion in 2025, but talked up revenue growth for both in 2024.

“A summary of our discussions on digital gaming, at times, resembles something like this: Revenue is going to grow and adjusted EBITDA margins are going to expand,” said analyst Carlo Santarelli. “If expectations fall short, it will likely be explained away by a string of bad luck and valuation will remain irrelevant.”

If these are the sentiments of most heading into 2025 and Santarelli said they believe they are, then the risk in the sector likely relates to exogenous events.

“In our time covering the gaming sector, we can’t recall a period where the noise around a subsector, from both the media and political officials, is as considerable as it is at present around the online sports betting and icasino industries. The most likely of these risks, in our view, are incremental tax increase headlines and or implementations, though much more sweeping reform risks are sure to linger on the periphery longer term. We believe the tax risk is most pronounced in states in which tax rates are not only low from a statutory perspective, but are even lower given promotional-deduction allowances.”

While Louisiana recently drew headlines with a proposal that mirrored that of New York, Santarelli doesn’t believe Louisiana is the risk the recent news would suggest it to be.

“Given Michigan has a relatively healthy tax rate on its robust icasino market and the rhetoric from Michigan in the aftermath of tax changes in neighboring Illinois and Ohio, we don’t believe a sports betting tax increase is a likely event in 2025. We do consider it a risk, given the negligible per capita sports betting taxes. We believe states such as Kansas, Arizona, Wyoming, Iowa, Colorado, and New Jersey, given efforts to increase the taxes on the digital businesses in 2024, do represent potential sources of industry consternation.”

With the exception of some guidance hiccups, 2024 was more or less a year of progress for most operators across the digital space.

Through October, revenue was up about 30% year-over-year in that sector, while Deutsche Bank’s same-store focal-state subset is up 19% as new online sports betting competition emerged and the market leaders maintained or grew share, Santarelli said. Icasino markets, despite difficult comparisons, have experienced gaming revenue acceleration in each of the three large scale states of New Jersey, Pennsylvania, and Michigan through October.
Santarelli expects continued and healthy same-store gaming revenue growth in 2025. That forecast is expected throughout the industry.

“We believe the key to 2025, perhaps for the first time in the post PASPA era, will be EBITDA and EBITDA margin improvement,” Santarelli said. “There are several levers that we believe will play varying roles in the EBITDA/EBITDA margin improvement stories.”

Deutsche Bank views Texas as the biggest opportunity for online sports betting in 2025; a failure for Texas to legalize could set the process in the state back another two years. The firm’s view on the opportunities in California and Florida where tribal partnerships are likely to be required is likely different than most.

While both states are viewed as significant opportunities, Santarelli believes tribal partnerships are likely to be unattractive, thereby removing both states from the potential blue-sky opportunity set and putting them in a bucket with New York, where the total-area market is significant, but profit is challenged due to high taxes.

“While the icasino situation features more shots on goal than online sports betting, we believe the prospects for legalization in the majority of the states with some form of a bill at present are low. Of the subset of New York, Ohio, Illinois, Indiana, Iowa, Maine, and Maryland, we believe Ohio and Maryland have the best prospects for near-term success, though we believe the most likely scenario is 2025 being void of newly legalized states. We see New York and Illinois, the two largest states in the discussion, as having the slimmest odds of success.”

Given a more limited state launch slate in 2024 relative to 2023, promotions as a percentage of gaming revenue were down slightly year-over-year through October, while hold through October was essentially flat on an industry-wide basis, Santarelli said. Investors shrugged off some actual and proposed tax increases and traded pure-play digital operators in line with or better than the major indexes.

“Valuation remains a foreign concept within the digital group, as peak multiples on blue sky outlooks continue to underpin the trading activity and narratives guide shares, both higher and lower over what has been a reasonably volatile, though decidedly better for bulls, during the year to date.”

Throughout 2024, Santarelli said operators focused on improving structural hold percentage through a combination of better risk management (primarily through limiting) and increased parlay mix and wager legs. Through September, industry hold stood at 9.7% for the year, up about 30 basis points versus the same period in 2023. October, however, eroded the upside as the month shaved 30 basis points off the year-to-date hold and brought it to 9.4%, in line with the prior year period, Santarelli said.

Despite the seeming stagnation in hold, operators remain bullish on their ability to improve structural hold. DraftKings offered guidance to 11% structural hold in 2025 versus 2024 expected structural hold of 10.5% and actual realized hold tracking at 10% for 2024.

Flutter is guiding to a longer-term gross hold of 16%, with net hold of 12% versus 2024 net hold of 8.4%. Caesars Entertainment is guiding to a longer-term gross hold of 10% versus gross hold in 2024 to date of 7.4%. Given the leverage of hold on both gaming taxes and variable costs, Santarelli sees migration toward these targeted goals as a key in the margin stories for 2025.

Likely the biggest needle mover for larger operator margins is the reduction in promotions as a percentage of gaming revenue/handle, Santarelli said. Industry promotions have not come down in any material fashion, though launch promotions have largely abated given fewer state launches.

“In the football season to date, promotions are growing faster than handle,” Santarelli said. “However, while this dynamic is true at an industry level, it is not entirely true at the company level. Both FanDuel and BetMGM have curbed promotions as a percentage of handle, while Caesars’s promotions as a percentage of handle are essentially flat and remain well below peer reinvestment levels.”

While DraftKings promotions as a percentage of handle are up year-over-year during football season, the increase is relatively modest when compared to the structural hold improvement DraftKings is articulating, Santarelli said. As such, the bulk of the industry increase in promotions as a percentage of handle relates to the uncovered or smaller operators.

“With no real impact from state launches in 2025, except Missouri perhaps in conjunction with the 2025/2026 football season, promotional reduction will be key to driving margin traction.”

After modest growth in 2023, both FanDuel and DraftKings accelerated the rate of growth of adjusted sales and marketing spending in 2024. Longer term, DraftKings targets adjusted external sales and marketing to account for about 10% of net revenue.

In 2024, Santarelli said they expect DraftKings’s adjusted external sales and marketing to represent 17%-18% of net revenue. Looking ahead to 2025 if they assume DraftKings can hold adjusted external sales and marketing broadly flat year-over-year while growing revenue to the midpoint of guidance, “DraftKings would exit 2025 with adjusted external sales and marketing representing 13.5% of net revenue, a healthy improvement, and a meaningful driver of the implied year-over-year margin bridge in 2025 (2024 margin guidance at midpoint: 5.3% / 2025 Margin guidance at midpoint: 14.8%).”

Santarelli said the parlay mix, as measured by parlay handle as a percentage of total handle for the larger operators, appears to be reaching “somewhat of a plateau.”

When analyzing the parlay metrics for the states in which parlay handle is reported, the parlay handle as a percentage of total handle, is up about 220 basis points (26.4% year-to-date 2024 versus 24.2% year-to-date 2023). Considering the push being made by the smaller operators and new entrants when measured by market share, which skew more recreational, Santarelli believes this likely implies the larger players are seeing a topping out of parlay mix. They expect the narrative from the operators in 2025 to shift with the likely offering being a greater focus on in-game wagering.

“Given in-game wagering is largely present today, we believe the shift is likely to be a greater focus on marketing and conversation around the in-play product,” Santarelli said. “This could be interesting on several fronts. For starters, from a favorable perspective, the in-play narrative is one folks can clamor around as a new driver of exponential growth until proven otherwise. However, the question one should ask in our view is whether this product brings in a new customer or merely adjusts the behavior of an existing customer.”

The most interesting dynamic around the in-game narrative is the impact of in-game wagering on hold, Santarelli said. He contends that the in-game product, despite the built in vigorish buffer, tends to be a lower hold product with a more limited parlay menu.

“To the extent in-game wagers expand as a percentage of the handle mix, the effect on aggregate hold would be negative, and for an industry for which elements of the bull case rely on hold expansion, it would appear counter-intuitive.”

Non-fundamental factors have been a big part of the story in digital gaming, both to the good and bad for stocks, When looking out at 2025, incorporating some non-fundamental aspects in their outlook has merit.

“Not to take anything away from the progress made by digital operators in 2024, which was broadly favorable, though certainly far from cementing the longer-term story to which valuations are anchored, we believe the primary bull case for the group remains the lack of alternative growth investments,” Santarelli said. “Given declines in other gaming and consumer sub-sectors, we don’t believe the growth versus valuation dynamic has played much of a role at all when it comes to comparing digital names to other gaming names. Should a growth narrative in the broader casino space or within other consumer discretionary spaces emerge, the scarcity value the digital sector growth story currently benefits from would be likely to dissipate as a growth when coupled with valuation- conversation would likely emerge.”