Its latest gaming research states more states are likely to legalize sports betting soon, and New York is considered as a significant long-term opportunity. The company expects USD 5 billion of US sports betting revenue in 2025. The Atlantic City onground market remains competitive, and Daily Fantasy Sports companies’ early success in NJ is “impressive, but the key question remains how enduring their first mover advantage will be”.

For the latest Morgan Stanley Research, the company visited Atlantic City, attended investor days, and hosted meetings related to sports betting last week. They met with The Action Network, Borgata, Catena, CZR, DraftKings, FanDuel, GamblingCompliance, GeoComply, Ocean  Resort, Resorts/Mohegan Sun, Tropicana/ERI, and TSG. The research identified 6 key takeaways.

More states likely to legalize sports betting soon

In December, Morgan Stanley increased its expectation for 10 states (including DC) to legalize sports betting in 2019. However, only DC has legalized year-to-date while some states are approaching the end of their legislative sessions. Still, a number of the companies and experts met are bullish, suggesting sports betting bills in some states are close to passing.

Indiana, Iowa, New Hampshire, Michigan, Massachusetts, New York and Illinois were the states cited the most as having strong potential to legalize this year, while others also saw Arkansas, Connecticut, Kansas and Ohio as possibilities. Morgan sees New York as a significant long-term opportunity (worth more to 10% of the total US sports betting market), but a constitutional amendment (a process that would extend two legislative sessions and need a referendum) is likely required to offer statewide online betting, meaning an online market no earlier than 2022. The NY state budget was due on Monday, and it could well include onground licenses for the four upstate casinos this year, which the NY gaming commission gave preliminary approval to at the end of January.

US sports betting should be more online than onground

Morgan was “surprised” that TSG laid out at its investor day a 2025 sports betting market where land-based is $6.1B and online is $2.8B, and TSG has no land-based expertise. “We are less bullish on the market size, expecting $5B of revenue in 2025, and expect a more heavily weighted online component,” states the firm.

New Jersey’s sports betting handle was 80% online in February, already significantly higher than the UK (around 50%), and Morgan believes a decent benchmark for states that are going from no established legal sports betting: “It’s clear, in our view, that the US market size will be driven by online availability, and states that want tax revenue are recognizing this: Rhode Island legalized mobile betting this week, after legalizing onground last year, and we could see other onground only states (Mississippi) do the same in the future.”

Separately, West Virginia just legalized online gaming (both casino and poker), effective in 90 days. While the meetings for the reaserch suggested iGaming is unlikely to pass in other states this year (Michigan may discuss), this could be a big opportunity in the future.

“March Madness” driving a strong month for New Jersey

Both online and onground sports book operators were upbeat about current betting traffic/volumes, and the broader benefits to their properties. While Atlantic City occupancy is generally high on Fridays, sports books were packed on Wednesday/Thursday last week (3/21-3/22), and the casino operators also highlighted a jump in food & beverage and table revenue.

Providing further support to NJ’s March onground revenue growth, there were multiple nor’easters last year, and the calendar adds a weekend day this year. Online operators also noted very strong March Madness betting volumes, though free play could inflate monthly handle as some viewed the event as a key customer acquisition opportunity.

“We have heard net win margins are in the 2.5-4% range (vs. reported 5-6% on cash accounting in recent months), suggesting a significant portion (we estimate 30-50%) of monthly reported handle is currently promotions, though PPB-FanDuel expect this to normalize at a 15-20% level in the long run. The media companies we spoke to struck a similarly positive tone, with one noting the NCAA event has had a far greater impact on engagement than the Super Bowl”, says the research.

The Atlantic City onground market remains competitive

Morgan Stanley believes the new properties in the market (Hard Rock and Ocean) have recently adjusted strategies to focus more on core gaming customers. Hard Rock continues to spend aggressively on entertainment, but is also shifting its focus to target more traditional gaming customers, while Ocean Resort is focusing on advertising its casino more and activating its legacy database (which was built with Revel’s “Gamblers Wanted” campaign).

This could shift the impact in the market from the luxury properties to the core properties. Morgan heard MGM (Borgata) has been marketing at a more steady state level in recent months, while CZR has been disciplined at its three properties, which may be dampening reported GGR numbers but helping EBITDA. Despite recent reports Showboat could reopen, operators saw it as a very low probability event in the near-term, complicated by being outdated and CZR’s deed restriction on the property.

The Stars Group (TSG, not covered) investor day left positives and concerns for the industry

TSG’s 8-12% 3-5 year annual revenue growth guidance highlights the attractive structural growth story online gambling companies can benefit from. In addition, strong poker businesses create attractive moats and generate significant FCF. On the other hand, TSG’s  guidance that margins would remain flat (on what should be a scalable technology business model) highlights the duty and investment headwinds that lie ahead. “MGMT downplayed the regulatory risks we are most wary of (Australia increasing its consumption tax rates to 15% across all states, the UK implementing online stake limits), while baking in headwinds from other higher duties and the need for increased marketing intensity.

“Daily Fantasy Sports companies’ early success in NJ is impressive, and makes us more bullish on them, but the key question remains how enduring their first mover advantage will be”

FanDuel’s early KPIs (key performance indicators) are very impressive in Morgan’s view: customers are twice as sticky as those in PPB’s other markets, with 12-month (contribution) paybacks on initial cohorts already delivering positive net contribution (revenue payback in 6 months), suggesting FanDuel and DraftKings may have already acquired the most valuable customers. The cross sell opportunity also seems very promising with more to go in casino.

Multiple operators (including onground, online, and media companies) spoke to the general stickiness of betting customers. One company noted it took ESPN roughly a decade to overtake Yahoo’s fantasy business, despite having a significantly better platform. Many also commented  that sign-up friction may lead to lower number of accounts per bettor than in Europe.

However, the next 6-12 months will test this thesis in three ways. A sizeable number of tier one operators to either ramp (WMH, GVC/MGM, TSG) or begin their operations (Bet365, Kindred Group) in New Jersey, testing market share dynamics and current customer loyalty and value metrics; the opening of new substantial states will present a test case where the national brand advantages of DFS operators  (existing customer bases, high brand awareness, network benefits) could be tested in a more intense competitive environment from the outset; and Google allowing online gambling brands to pay for ads could shift the customer acquisition dynamic.


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