Sports betting stocks slide after Illinois lawmakers approve tax hike

Online sports betting stocks declined Monday following Illinois' approval of a budget that increases taxes on wagers, raising concerns about similar measures in other states. DraftKings and Flutter Entertainment shares fell over 5% and 3%, respectively, after Illinois lawmakers approved a tax of up to 50 cents per online sports bet. Truist analyst Barry Jonas noted this is the second consecutive year Illinois has unexpectedly raised taxes on the industry, potentially impacting smaller competitors less than larger players like DraftKings and Flutter's FanDuel; the move has prompted speculation about other states increasing online sports gambling taxes to address budget deficits.

Analysis

Online sports betting equities experienced a notable downturn following the Illinois legislature's approval of a budget that significantly increases taxes on wagers, heightening investor concerns that other states might implement similar fiscal measures. Shares of DraftKings (DKNG) declined by over 5%, Flutter Entertainment (FLUT) fell more than 3%, MGM Resorts (MGM) saw an almost 2% drop, Penn Entertainment (PENN) decreased by as much as 1.6%, and the Roundhill Sports Betting & iGaming ETF (BETZ) eased by over 1%. The new Illinois tax structure imposes a levy of 25 cents per wager on the first 20 million online sports bets each fiscal year, which then rises to 50 cents per bet. Truist analyst Barry Jonas described this as a 'last-minute surprise,' marking the second consecutive year Illinois has unexpectedly imposed higher taxes on the industry, positioning it among the states with the highest tax rates for sports betting. Jonas anticipates that major operators like DraftKings and Flutter's FanDuel will 'certainly' surpass the 20 million wager threshold, thereby facing the higher tax rate on a significant portion of their bets, while the impact on smaller competitors is expected to be more 'modest.' This development has amplified concerns on Wall Street about 'regulatory contagion,' where other states might seek to address budget deficits by adopting or increasing taxes on online sports gambling, a sector where tax rates already vary significantly, from 6.75% in states like Nevada and Iowa to 51% in New Hampshire, New York, and Rhode Island, and where only 27 states and D.C. currently permit statewide online sports betting.

Key Decisions for Investors

• Investors should closely monitor legislative developments in other US states for potential tax increases on online sports betting, as the Illinois measure could signal a wider trend impacting sector profitability.
• Re-evaluate exposure to online sports betting companies, particularly market leaders like DraftKings and Flutter Entertainment with substantial Illinois operations, considering the direct impact of higher tax rates on their margins and the strongly negative sentiment highlighted.
• Consider the potential for margin compression across the online sports betting industry if more states follow Illinois' lead in raising taxes to address budget deficits, which could temper long-term growth outlooks.
• Assess the risk that increased taxation could become a more significant headwind for the sector, potentially offsetting the tailwinds from market expansion as more states legalize online sports betting.