Friday, June 21, 2024

Jim Chanos turns bullish on US gambling thanks to America’s ‘bad bettors’

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Hedge fund manager Jim Chanos has switched to a bullish stance on the US gambling industry’s prospects after assessing that Americans lured in by novel wagers are surprisingly “bad bettors”.

The comments mark a change of tune for the short seller who last month told investors he was shutting his main short-focused hedge funds after more than three decades in business and who previously had a high-profile bet against online bookmaker DraftKings.

Chanos began shorting DraftKings in May 2021, arguing publicly that its business model was flawed because of its massive spending on marketing and uncertain path to profitability. But in July last year Chanos & Co exited the short position, which accounted for only about 2 per cent of the fund, booking a $10mn profit.

Best known for betting against energy group Enron before its bankruptcy in 2001, Chanos said he had reassessed his pessimism about online sports betting, which has boomed since a Supreme Court verdict liberalised the industry five years ago.

“The betting numbers have continued to be strong in the US, stronger than we thought they’d be,” he told the Financial Times. “The thing that we underestimated — that I think is going to be a benefit for all these companies for a while anyway — is what bad bettors the US gamblers are.”

Chanos closed his short after witnessing the growth in riskier forms of betting through which operators are able to boost margins because the odds are less transparent. These include in-game bets, proposition bets where gamblers wager on certain events happening and multi-string, accumulator bets.

During the 2022-23 National Football League season, Chanos realised that gamblers were rapidly switching from pre-game wagers, where competition to attract those who shop around for the best odds forces sports gambling groups to keep their margins at about 5 per cent, to these new types of bets.

Such wagers have “really bad-odds bets for [gamblers] . . . so it’s become a better business than we thought it would be and we saw that during last year’s football season and that’s why we covered our short”, Chanos said.

In-game bets typically command a margin of about 8 per cent, and proposition and accumulator bets boost margins above 10 per cent, according to Chad Beynon, an analyst at Macquarie Group.

The gross margin or “hold”, the percentage of money that sports gambling groups keep for every dollar wagered, has grown significantly since the regulated industry was created in 2018 as the new betting products have proliferated. This year it is on track to hit about 9 per cent, up from just 6.7 per cent five years ago, according to data compiled by Macquarie.

Alun Bowden, an analyst at gambling consultancy Eilers & Krejcik Gaming, said growth had been driven in part by the rising number of in-match events on which gamblers can bet. But the growth had mostly come from new forms of betting offered by US betting apps that “disguise the margin”, such as accumulator bets, particularly those on a single event known as same game parlays.

“The traditional way of betting is two-way markets where the margins are clear to players, but same game parlays massively increase the margin but in a way that is much less obvious to the consumer,” said Bowden.

About a quarter of all bets are in-game wagers, according to sports wager group BetVision, but this is expected eventually to rise to 70-80 per cent, in line with more mature markets.

The two biggest betting operators reported their first profits this year, with Dublin-based Flutter making $62.5mn in the first half and DraftKings turning profitable in the second quarter and expected to post a full-year profit in 2024.

DraftKings’ share price has more than tripled this year to $35.35 as of Friday’s close. Chanos, who took his short position when the stock was trading at more than $45 a share, said the betting industry in the US was “turning into a duopoly” with FanDuel and DraftKings controlling the vast majority of the market.

“We covered our DraftKings’ [short] at mid-teens, so that one worked out well for us,” he added.

Chanos & Co is returning the bulk of the funds to investors by year-end, with the firm’s assets having dropped from between $6bn and $7bn at the end of 2008 to less than $200mn. He will continue to offer bespoke advice on fundamental short ideas as well as some macro insights.

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