Sports betting companies have an acquisition addiction

Sports betting companies are getting bought up left and right — and there may be more coming.

Yesterday, DraftKings announced plans to acquire sports betting player, Golden Nugget Online (NASDAQ:GNOG) for $1.6b — sending GNOG up 50%.

What’s the big deal? Sports betting companies are in an acquisitive mode, as they look to take market share in the growing industry.

This is the second big sports betting acquisition in two weeks. Last week, competitor Penn National Gaming (NASDAQ:PENN) announced plans to acquire Canadian sports betting and media company, TheScore (NASDAQ:SCR).

But after a record 2021 year of IPOs and stock returns in the sports betting industry, momentum in the industry has stalled.

• Since peaking in March, DKNG is down 28% and PENN is down 45%.
• The Roundhill Sports Betting & iGaming ETF (NYSE:BETZ) is up 12% in 2021 — far from the 50% gain in 2020.

Why buy GNOG? There are two likely reasons for DraftKings’ purchase:

• More customers: Acquiring customers is expensive in the sports betting industry and now, DKNG has access to GNOG’s 5m+ customers.
• Diversification: Before the purchase, DKNG mainly operated in the sports betting sector. GNOG gives DKNG access to its online casino products — diversifying its revenue.

The news sent other sports betting stocks like Rush Street Interactive (NYSE:RSI) up 14% and FuboTV (NYSE:FUBO) up 6% — signaling expectations for more acquisitions.

Looking forward: Expect more potential acquisitions and higher sales. In its earnings report last week, DKNG raised its full-year revenue forecast by 14% — a sign of continued growth in the industry.

Despite all the positive news, DKNG’s stock barely moved. Its high valuation (forward price-to-sales multiple of 15x) is holding it back from advancing. At this price, DraftKings doesn’t have much room for error.