Should Gambling Investors Cash in or Cash out?

Posted by Harry Kane on Thursday, June 28, 2018

The growth of online casinos and sports betting hubs has been pronounced in recent times, creating a total market worth £4.7 billion last year. Not only has this evolved to claim a whopping 34% of the industry as a whole, but it has also helped to popularise gambling disciplines among new and younger playing demographics.

To this end, the UK Gambling Commission (UKGC) estimated that 48% adults gambled regularly in 2016, and this represented a 3% increase on 2015 figures.

With number of active online gambling accounts also increasing each year, it’s little wonder that investors have been drawn in their droves to this industry in recent times. However, as they look to profit from rising share values and potentially lucrative acquisitions, both the government and the UKGC have strived to tighten the regulatory framework supporting on and offline gambling.

In this post, we’ll look at these measures in further detail while asking whether they’re likely to deter investors from backing gambling brands in the future.

The FOBT Crackdown, and What it Means for Investors

Of course, the regulators have saved their most radical forms for the offline gambling sector, with fixed-odds betting terminals (FOBTs) having recently seen their maximum stake slashed from £100 to just £2.

This measure was imposed after an in-depth review of these machines, which under the previous legislation enabled players to spend up to £300 per minute on computerised iterations of slot and casino games. While bookmakers knew that the Government department for Digital, Culture, Media and Sport (DCMS) would cap this threshold, however, they were stunned by the decision to reduce this to a single figure sum.

We’ve since seen shock waves tear through the industry, with bookmakers counting the potential cost to their business while pledging to launch a formal appeal regarding the extent of the cap. According to the Association of British Bookmakers, this could ultimately put more than 4,000 betting shops out of business, while also costing the economy 21,000 jobs against a continued backdrop of Brexit uncertainty.

Naturally, the reaction of the stock markets was a negative one, with shares in both William Hill and Ladbrokes Coral (two of the UK’s major high street players) declining by more 10% in just 24 hours after the government announced its final decision. Interestingly, online rivals GVC and Paddy Power Betfair also saw their share prices fall by 5.6% and 2.7% respectively, as risk-averse investors ran for cover and reconsidered their stake in the gambling market as a whole (a little more on this later).

Once again, the main issue from an investor perspective was the scope of the cap, which was far bigger than anyone had initially anticipated. According to most sources, investors had priced in an FOBT maximum stake cut to £20, which was slightly more pessimistic that the bookmakers who had predicted a threshold of £30 to be recommended.

Make no mistake; the short-term impact on investors has been pronounced, particularly for those with an aversion to risk or a desire to achieve interim returns. To determine the longer-term impact, we need to understand how the online market will be impacted by this and similar regulatory measures.

The Long-term Outlook for Online Gambling

Some may argue that the FOBT crackdown will merely hasten the decline of offline gambling, and encourage multi-channel brands like William Hill to invest more of their time and money online.

So, while William Hill’s recent announcement that it may be forced to close 900 of its UK shops and lose between £70 and £100 million in profits per annum explains its declining share value the negative sentiment surrounding the market at present, there remains a belief that the brand will be able to recoup these losses relatively easily by extending its online presence.

This could actively encourage investors with a long-term outlook to increase their stake at a lower price, before looking to capitalise as these shares become more lucrative over time.

However, this ignores the simple fact that brands like William Hill have actively increased their offline presence in recent times, while its high streets remain extremely profitable. The same can be said for rivals Paddy Power Betfair, who recently claimed that the FOBT cap would potentially consumer 44% of their total gaming revenues (or £46 million to you and me).

This means that a potential decline in offline gambling could have a direct and negative impact on the virtual marketplace, triggering a sustained and widespread fall in profits and causing a swathe of investors to cash out their stakes in major bookmaker brands.

To support this assertion, we must remember that the government will be quick recoup some of its own losses in terms of tax revenue. In fact, it has already been asserted that the Chancellor is prepared to apply higher duties to online operators and casino games, diminishing investor sentiment further while dealing a second blow to prominent, multi-channel brands.

In this scenario, it’s clear that some investors would be inclined to seek refuge in other stocks as associated share prices becoming increasingly volatile over time.

The Last Word – A Reason for Optimism

With the UKGC also keen on safeguarding the interests of vulnerable players and the industry’s reputation as part of its key strategy objective through 2021, we’re likely to see further regulatory reforms in the online space.

Many of these will revolve around practices such as advertising and promotions, while the regulator has also made strides the negate the threat of money laundering within the market.

While seems to strengthen the argument that investors will turn away from the gambling industry as a whole, we should not forget that the current generation of financial market traders are more thick-skinned and deterministic than ever before.

This means that they’re accustomed to volatile markets and have the tools to actively profit from price shifts and declining share values, and in this respect the recent decline in bookmaker share prices will be viewed as an opportunity to optimise long-term gains.

Not only this, but share prices in the industry have already hit their nadir following the announcement of the £2 FOBT cut, and from a practical point of view it makes more sense for investors to buy rather than sell stock in bookmaker brands.

So, while me may see risk-averse or short-term investors cash out their stakes in the gambling market, others likely to spend more in pursuit of more substantial, long-term gains.