The Super Bowl was a bonanza for the gambling business thanks to new customers from New York, which recently legalized sports betting. But now comes the hard part for companies like DraftKings and FanDuel.

Betting upstarts need to spend big bucks to attract new users — but like a gambler chasing a huge payday, companies can easily get in over their heads with marketing and acquisition costs if they’re not careful.

That challenge was on full display with DraftKings, whose shares plunged nearly 20% Friday despite sales that topped expectations and a boosted outlook.

Investors are clearly concerned that the company is expected to continue losing money this year as it spends heavily on ads and promotions. And DraftKings also said first-quarter sales would be lower than Wall Street forecasts.

Ad spend isn’t the only headwind for DraftKings. CEO Jason Robins said in an interview with CNN Business that the current lockout in Major League Baseball could be a problem since it may lead to a delayed start and shortened season.

“When games are not being played, that is not positive for us,” Robins said, comparing the possibility of fewer baseball games to the shutdown of nearly all sports that took place in the spring of 2020 at the start of the pandemic. “Hopefully, baseball will figure this out.”

Meanwhile, DraftKings faces tough competition from FanDuel — owned by UK-based sports betting company Flutter Entertainment (PDYPF) — as well as traditional casinos such as MGM (MGM), Caesars (CZR) and Penn National Gaming (PENN), which has a big minority stake in Barstool Sports.

The crowded field forces rivals to try to out-promote one another other, often luring them with limited offers of free bets. The hope is to gain a loyal and frequent customer, but such promotions eat into short-term profits.

Gambling surged to new records last year

Targeted approaches are key. Robins told investors during a conference call Friday morning that the company was not planning to spend too heavily in new markets.

“When the New York market launched, there was some aggressive promotional behavior by many operators, but DraftKings is committed to maintaining its disciplined approach to customer acquisition and is targeting a two- to three-year path to profitability for the state,” Robins said.

Robins added during the interview with CNN Business that the company had record volume for the Super Bowl. He also said that the increased marketing by DraftKings and its rivals was a positive for the overall industry.

“We’re doing better than ever and the increased overall spending is helping us. There is a lot of awareness for the industry,” Robins said.

But investors don’t seem to see it that way. The sports betting market is still in the nascent, land-grab stage where market share may matter more than profits. And there is big money backing some of DraftKings’ rivals.

Competition is fierce

Barry Diller’s IAC (IAC) media conglomerate owns a more than 12% stake in MGM and recently announced plans to raise that stake to nearly 15%. CEO Joey Levin said in an interview with CNN Business that MGM’s New York launch was successful, and Super Bowl demand was strong

Flutter’s FanDuel is also aggressively going after new customers, while trying to keep existing gamblers happy in its established markets.

FanDuel chief marketing officer Mike Raffensperger told CNN Business before the Super Bowl that there was no doubt that 2022 would be the biggest year so far for betting on the game. That’s a function of both new states like New York as well as strong growth in maturer markets like neighboring New Jersey, where sports betting has been legal since summer 2018.

“We’re talking about 70% more bets on the Super Bowl from this time a year ago,” Raffensperger said.

Raffensperger added that there was a lot of interest in so-called “proposition bets” — wagers that go beyond traditional bets. One popular prop bet let people wager on a player who wasn’t a quarterback throwing a touchdown. (That gamble paid off: Cincinnati running back Joe Mixon passed for a score.)

Still, shares of FanDuel owner Flutter have also been hurt by the intense competition. The stock is down 6% in 2022 and more than 20% in the past 12 months. MGM, Caesars and Penn are in the red this year, too.

Investors aren’t betting on a long-term winner in the industry just yet. They’re waiting for the dust to settle after the marketing blitz is over.

https://www.cnn.com/2022/02/18/investing/draftkings-fanduel-mgm-super-bowl-bets/index.html