Turning to the markets, our themes seem to be kicking into high gear as EMs continue to suck flows out of the US. We expect some rips out of the US, but there is more pain ahead in ’25 as TINA (for US growth) doesn’t just take a month to die, this will take some time to unwind. Looking around the corner, we mentioned we were firming up our Christmas list for when Trump/Bessent turn on the spigot and run it hot. So we invited our analyst to the KEDM pages to drop a theme geared to inflation, America First and stimmies, that we will be hunting when that time comes…
Long-time readers know we love talking about is the ZIRP era, the transition to rising rates and the lasting ills from the 2020-2021 period. Everyone and their mother was starting/merging with a SPAC and VCs were tripping over each other trying to dump their trash onto the public markets. Most of these companies (calling them “companies” is generous…) cratered upon the arrival of higher rates.
Meanwhile, there seems to be a handful of real companies from this era that took in a ton of money, overspent on user acquisition, consolidated their industries, and emerged as monopoly/oligopoly companies capitalizing on huge trends with massive operating leverage. They may have wasted massive amounts of money to gain scale, but that turns into a moat against potential competitors who can’t afford to lose the same amounts of money in a post-ZIRP era.
One of these industries is online gambling in the US – both online sports betting (OSB) and iGaming/iCasino. When SCOTUS overturned PASPA in 2018, the land-grab for the US online gambling market was on. DraftKings and FanDuel (now owned by Flutter) had a head start from their dominance of the Daily Fantasy Sports (DFS) industry. DFS was the closest thing to OSB that was sorta legal, and these customers were ready to bet when PASPA was repealed. DraftKings and FanDuel took this head start, threw another $2.3bn of negative EBITDA on top to acquire customers, and now control ~75% of the OSB market.
Meanwhile, the US is full of degenerates and love to bet on anything they can from the comfort of their couch. OSB grew 25% in 2024, including between 10-20% in “legacy” states (NY, MI, and PA are entering their 4th, 5th and 7th year of legal OSB).
The sustained growth has allowed the duopoly to further their lead on the industry and bolster their scale. Running a sub-scale sportsbook is a quick way to lose money. You might be able to offer the basic assortment of bets on major sports, but adding sports and bet types requires significant technology and risk management investments. Your balance sheet small, so you have to limit how aggressive you are when making odds. Even if you wanted to be aggressive, your models to predict sports outcomes are average. Your predicted outcomes have a larger range, so aggressive odds means you’re taking a ton of risk that you’re on the wrong side of the expected value equation. To overcome your subpar product, you have to offer more promotions to attract and retain customers, eating up whatever margin you might have. Each new state you launch in requires a significant marketing and promotion effort since your brand isn’t a household name. This is an expensive uphill battle, that all but ensures that you remain behind the market leaders on product quality along the way.
For the market leaders, all these factors are reversed. You been building out your technology for many years and are able to roll it out across more sports and introduce more bet types. Better models means you can offer better odds more profitably, and continue to improve your product and experience. Customers tend to care about having the best access to the most sports to bet on and having the most ways to bet on their favorite sports.
Betting in 2025 is not your father’s betting. Sure, you can still bet on single money lines and spreads, but betters are drawn to either complex parlays or fast paced in-game bets. DraftKings even lets you bet on the mph of the next pitch in baseball, whether the next play in football will be a first down, or if the next basket will be a two or three pointer.
These bets require near-instant data collection, odds pricing and risk management from the sportsbook across hundreds of live games and millions of active betters. This technology requires significant investment that only makes sense for scaled sportsbooks, since the significant resources required only make sense if you can roll it out to millions of customers. At the end of the day, the industry giants continue to increase their lead in product against the rest of the field.
In many ways, the path for how value accrues to scale is textbook: scale lets a company drive huge numbers of relatively low margin transaction over fixed overhead costs. The economics in a fragmented market look horrendous, but the economics for consolidated market leaders show great operating leverage and FCF growth that juice the underlying growth of the industry…
Turning back to the theme at hand, what happens when Trump/Bessent eventually run it hot?? Yes, they are working hard to cap rates and flush the system (i.e. recession) but we are long term thinkers at KEDM, so let’s look around the corner…Stimmies are likely, blue collar/manufacturing will likely uptick, flyover states will boom and inflation roars. Our guess is that the population most geared to Trump 2.0 (blue collar with higher wages plus a sprinkle of stimmy), will find a bit more in their pockets and will try to outrun inflation. Unlike with coastal city woke elites, they are not dropping their excess into Mag7 though, they will turn to what they know…
Study this chart:
Bottomline, we have a solid business within an duopoly that is positively skewed to some longer term themes on our radar. When there is blood in the streets, this will be high up on our Christmas list along with all the brick and mortar casinos….
