Fitch: Tax hikes could stunt sports betting’s growth
“Recent and proposed state sports betting tax hikes could dampen the online gaming sector’s positive growth momentum,” Fitch Ratings Associate Director David Lowenstein wrote in a 16 June investor note. He observed, however, that the ratings of market leaders FanDuel and DraftKings would nevertheless likely be unaffected.
Those bond ratings, Lowenstein wrote, “continue to reflect the sector’s strong growth prospects, conservative financial structures and robust [free cash flow] profile.” On the other hand, the sector’s competitive dynamics (high) and the public-policy landscape (evolving) had to be considered, he added.
Sports betting operators, he continued, would face negative earnings implications from recent OSB tax increases in Illinois, Louisiana and Maryland. Those levies reflected a state-level need for more and diversified revenue, Lowenstein opined.
The analyst noted that additional impost increases were under consideration in the legislatures of New Jersey, North Carolina and Massachusetts. The Garden State was weighing a tax hike that would almost double the levy on sports-betting revenues from 13% to 25%.
“While no single state’s sports betting tax represents enough risk to affect either [FanDuel’s] or DraftKings ratings, a trend of higher sports betting taxes across the country could limit the margin upside for the sector,” Lowenstein wrote.
Operators, he continued, faced the hard choice of potentially tightening odds or instituting service charges, as FanDuel and DraftKings will do in Illinois on 1 September. The risk, he explained, was that rivals might undercut market share by “engaging in promotional pricing, illegal forms of sports betting, or alternative forms of betting such as prediction markets.”
An additional, if temporary setback, was unfavorable game results. This had happened recently in March Madness and the NFL season, in which favorites prevailed in record numbers. “The trends underscore the inherent volatility in the sports betting industry,” Lowenstein warned, adding that such volatility had been factored into Fitch’s ratings.
One source of potential OSB growth would lie in the legalization of sports betting in additional states, Lowenstein opined. But the newfound revenue might come at the cost of low margins “as operators will likely invest heavily on player acquisition in the beginning.” While online sports wagering is not offered in 20 states at present, budgetary shortfalls and challenges might change that, the analyst offered.
Fitch’s arithmetic for DraftKings and FanDuel assumes no additional, major United States legalizations, Lowenstein elaborated, at least in the near term. He forecast improving cash-flow margins for DraftKings, reaching 23 percent in 2027, “which reflects strong revenue growth, declining marketing expenses as a percentage of revenues, and a normalization in sports outcomes.”
During the same, two-year period, FanDuel parent Flutter Entertainment is projected to widen its cash-flow margins from 16.5% in 2024 to 20% in 2027. Lowenstein pointed out that BetMGM on 16 June raised its 2025 cash-flow projection to US$100 million.
“DraftKings has significant leverage headroom, and Fitch does not see the potential tax hikes negatively affecting the ratings,” the analyst elaborated. FanDuel, he added, does not have as high of a ceiling, in large part because of share repurchases, recently incepted.
Fitch, Lowenstein resumed, did not expect BetMGM parents MGM Resorts International or Entain to be negatively affected in terms of leverage, as BetMGM was self-funded. “Flutter’s and Entain’s diversification across geographies and revenue streams also mitigates the impact of fiscal pressure in any particular market.”
Lowenstein ended by pointing out that first-quarter sports betting had grown 13.6% in terms of revenue, while iGaming had leapt 27.3%. this meant a blended growth rate of 15.3%.
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David McKee is an award-winning journalist who has three decades of experience covering the gaming industry.
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