Sports Stocks Rebound in May Despite Regulatory Headwinds

The Sportico Sports Stock Index, a comprehensive barometer of the sports business sector, closed the month of May with a robust 6% gain. This strong performance marked the index’s best monthly showing since December, closing at 1,158 points and moving into positive territory for the year. The index’s 40 constituent companies, spanning a diverse range of industries from sports teams and broadcasters to sporting goods manufacturers and venue operators, have collectively demonstrated resilience in the face of a challenging market environment.

The recent agreement in Illinois to raise the tax rate on mobile sports betting to a staggering 40% sent shockwaves through the industry, with market leaders DraftKings and FanDuel bearing the brunt of the impact.

DraftKings saw its shares plummet by 14% last week and 16% for the entire month of May in response to the Illinois tax hike. Similarly, Flutter Entertainment, the parent company of FanDuel, experienced a significant pullback, with its shares losing a substantial portion of their early May gains to close the month up just 3%. The two companies, which collectively control around 90% of the Illinois sports betting market, are now grappling with the financial implications of the increased tax burden.

The Illinois tax hike has sparked concerns among industry analysts and investors about the potential for a “contagion risk” – the possibility of other states following suit and implementing similar tax increases on sports betting operators. UBS betting stocks analyst Benjamin Shelley has warned that this trend could pose a significant challenge to the industry, as states increasingly view sports betting as a lucrative source of tax revenue.

The recent tax-related developments in Illinois, Massachusetts, and Ohio have heightened the regulatory uncertainty faced by sports betting companies. Morningstar analyst Dan Wasiolek cautioned that these policy changes are likely to create near-term volatility in the shares of DraftKings and its peers, as the industry grapples with the evolving regulatory landscape.

In the face of these regulatory challenges, the sports betting industry has been hoping for a shift towards more profitable mobile casino games, which are less prone to the unpredictability that has plagued traditional sports betting. However, the industry’s efforts to push for increased mobile casino opportunities have so far met with limited success, as states appear to be prioritizing tax revenue generation over the industry’s preferred path forward.

While the broader sports betting landscape faced headwinds, one standout performer in the Sportico Sports Stock Index was Rush Street Interactive (RSI). The company’s mobile sports betting and casino business generated a robust 35% revenue increase in the first quarter, and it also benefited from strong performance in Latin America, where its sportsbook revenue grew by 84% year-over-year. RSI’s ability to cross-sell between sports betting and mobile casino games has been a key driver of its success, as per Jefferies & Co.

Another top performer in the index was Super Group, the parent company of the Betway sports betting brand. Despite a widening loss in its U.S. operations, the company exceeded Wall Street expectations in its first-quarter earnings report. Interestingly, CEO Neal Menashe did not rule out the possibility of the company exiting the U.S. sports betting market altogether.