In recent years, some investors have been hot to trot for an early play on the supposed next big thing. 3D printing, artificial intelligence, anything blockchain-related and marijuana firms have all taken turns in the spotlight. The latest supposed darling? Sports betting, thanks to a recent Supreme Court decision enabling states to legally offer sports betting, if they so choose. Previously, betting was legal only in Nevada. Investors seem excited about the potential for the estimated $150 billion illegally wagered on sports to turn into legitimate corporate income, and they are focusing most on established European gambling companies that could capitalize. As with marijuana-related firms, however, investors eyeing this space are probably getting too far ahead of themselves.
Some big European gambling firms have made inroads into the American market via mergers and acquisitions in recent years, presumably positioning them well to take advantage of the Supreme Court’s decision. However, it is far from certain they will be able to partner with casinos and participate in a sophisticated online betting market, which seems to be what eager investors hope for. The terms of potential agreements are unknown today, and any participation would be subject to state regulators’ whims. Other unknowns include taxation, so-called “integrity fees” paid to the sports leagues, revenue-sharing agreements with Native American tribes running casinos in states that don’t otherwise permit gaming, and whether any and all states will even choose to legalize sports betting. It will take significant time to work through all these issues and it is impossible to know today how profitable this endeavor would be for European firms trying to get in on the action. They may end up upstaged by players investors can’t fathom entering the market today. Or regional US casinos could end up best-positioned to open up sports betting, especially if states limit where betting can occur.
Markets move most on the gap between reality and expectations over the next 3 – 30 months, and it seems fair to say expectations for gambling firms are quite high right now. Investors excited over this seem to be broadly ignoring the regulatory headwinds and potential progress’s likely glacial pace. Meanwhile, in addition to the structural headwinds, cyclical factors likely work against them for the foreseeable future. These European gambling outfits are all small companies, and small cap tends to underperform in maturing bull markets—a time when investors typically gravitate to the largest global firms with the most diverse revenue streams and the most familiar brand names. They are also in the Consumer Discretionary sector, which tends to do best earlier in bull markets due to the sector’s heightened economic sensitivity. Staples usually have an edge in the world of Consumer stocks late in a bull.
This isn’t to say there will never be timely investment opportunities surrounding sports betting in the US. But with regulatory uncertainty so high at present and the bull market likely in its latter stages, the optimal time for investors to consider moving into this space is likely quite a way off from here.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.