The shares of Churchill Downs (NASDAQ: CHDN) continued to race ahead after the third-quarter results in October supported by double-digit growth in online wagering and a broader momentum in all sports betting stocks. Apart from the popular horse racing business, the company has multiple casinos and an online gaming platform, BetAmerica. While the sports betting frenzy has pushed CHDN stock 30% above pre-Covid highs, Trefis believes that the stock is a risky pick from the online gaming pool. This is largely due to a considerably higher share of horse racing wagers instead of sports betting and iGaming handle. In Q3 2020, the company’s TwinSpires platform, exclusive for horse racing, contributed 98% of the total online betting handle. We highlight the historical trends in Churchill Downs’ revenues, earnings, and stock price in an interactive dashboard analysis, Why Churchill Downs Stock Has Gained 170% since the end of 2017?
Supported by horse racing and a couple of acquisitions, Churchill Downs’ revenues increased by 50% from $882 million in 2017 to $1.3 billion in 2019. However, the net margins deteriorated from 16% to 10% over the period as total debt surged by 30% resulting in higher interest expense.
Given the broader momentum in sports betting stocks, the P/S (price-to-sales) multiple has surged from 4.2 in 2017 to 6 at present. Despite the 37% growth in online wagering revenues during the first nine months, we believe the stock is unlikely to see significant upside as the online business was primarily driven by horse racing as opposed to the success of FanDuel and Barstool in multiple gaming categories.
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Overview of Sports Betting Industry
After the Supreme Court overturned the Professional and Amateur Sports Protection Act (“PASPA”) in 2018, the sports betting and iGaming industry went live in 25 states. Currently, Nevada, New Jersey, and Pennsylvania account for almost 75% of the sports betting handle. At maturity, the sports betting and iGaming industry is likely to reach $40 billion in the U.S. and $70 billion globally. Thus, multiple sports betting applications, including FanDuel, bet365, Hardrock Café, BetMGM, and William Hill, are eyeing a sizable share of the pie.
Although CHDN Stock may not be attractive, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how how the stock valuation for Home Depot vs World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.