Some gambles are paying off for Entain

Entain (LSE:ENT)’s gamble to conquer overseas markets in addition to its core UK offering is showing signs of paying off, with potentially the largest target of all exhibiting particular promise.

The US has loosened some of its regulatory grip over recent years, and the addressable market has been estimated to exceed $35 billion of revenue, a true pot of gold at the end of the rainbow. Rival Flutter Entertainment (LSE:FLTR) responded to this prospect by moving its primary listing to the New York Stock Exchange in May, citing greater potential access to liquidity as well as heightened brand awareness.

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For Entain, US exposure comes in the form of its joint venture, BetMGM, where the unit has recently become earnings positive. It has been a tough slog for the group to get to this stage, where promotional investment has been something of a necessary headwind. Indeed, being such a fast-growing and lucrative market for providers has quickly led to a level of fierce competition, whereby the joint venture will need to continue running to keep still as other competitors emerge, and as existing players double down on their offerings in terms of pricing, promotion and presence.

Even so, BetMGM now boasts a 15% market share in the areas in which it operates, including an eye-catching 22% share in the burgeoning iGaming space. In the third quarter to 30 September, Net Gaming Revenue (NGR) rose by 18%, reflecting an improved product range and increased investment in customer acquisition.

Meanwhile, the introduction of a “Single Account Single Wallet” which allows the customer to gamble in different states is showing promising signs of player engagement, while the opening of Nevada is providing more opportunities, not least of which where the company could experience visitor footfall in Las Vegas.

Outside of the US, the core home market has also returned to NGR growth of 2%, while Brazil remains an area to watch with growth of 48%, albeit from a lower base. NGR for the group as a whole rose by 8% in the period, including a 10% hike in online revenue outside of the US, with volume growth and an improvement in sports betting margins being particular tailwinds.

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The better-than-expected quarterly performance has also led the group to upgrade guidance for the full year, with online NGR revised up to mid single-digit growth, and with earnings now expected to be towards the top of its previously estimated range of £1.04 billion to £1.09 billion.

For all this progress, regulation remains an intractable thorn in the side for gambling companies, and Entain is certainly no exception. The spectre of regulation is a constant threat, with problem gambling being an easy political target in any of the jurisdictions in which the group operates.

Entain shares fell almost 8% at the beginning of the week following reports that the Treasury was considering a tax raid on gambling stocks which could raise anything up to £3 billion. This follows previous crackdowns in both the UK and Germany as well as higher deposit limits in the Netherlands, all of which inject shorter term changes to consumer behaviour as the changes are absorbed. 

In addition, there are other pressing concerns, such as the consumer’s propensity to spend given the wider economic picture, and whether the cost-of-living crisis will simply remove some of the revenues which may otherwise have come Entain’s way. The ongoing move towards geographical diversification may mitigate this impact, particularly if the US offering continues to encroach upon the potential riches which the country provides.

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In sharp contrast to the fortunes of Flutter, the Entain share price has struggled. A decline of 26% over the last year compares to a gain of 8.5% for the wider FTSE100, and brings the cumulative fall over the last three years to 66%, when the shares peaked at over £21.

Nonetheless, with BetMGM remaining the most exciting driver for potential growth, and despite the regulatory headwinds which apparently persist, the group remains well-regarded. As such, the market consensus of the shares as a buy continues to reflect optimism in prospects for established longer-term growth.