Online gambling involves a wide variety of products that stem from traditional gambling houses to new internet-only products. The growing interest in online gambling has seen the overall gambling industry unlock new business opportunities including app-based gambling via mobile devices and year-long fantasy sports betting competitions, which allow players to make money by speculating on the outcomes of their favorite sports/athletes.
Real money Online Gambling is largely outlawed in the U.S., with only a few states (Nevada and New Jersey, to name a couple) allowing companies to transact business in the sector. Nonetheless, more states are still evaluating ways of allowing real money gambling as interest continues to grow among resident gamblers and companies.
While real money gambling as widely known in Europe and other parts of the world is illegal under U.S. federal laws, betting on fantasy sports is considered legal. In fact, the number of fantasy sports players in the U.S. has now grown to 56.8 million from 41.5 million in 2014 according to the Fantasy Sports Trade Association.
Now, fantasy sports betting isslightly different from the real sports betting as many people know it. Sports betting is a faction of online gambling. For more information about the various sections of online gambling visit here.
Yahoo! (YHOO, Financial), which is one of the leading internet-based companies, announced in July its entry into the daily fantasy sports betting market, with the launch of Yahoo! Sports Daily Fantasy app, which will allows players to apply their fantasy sports skills on daily events. The company is looking for new ways to boost its declining revenues.
Yahoo! has been facing a serious challenge with regard to its organic business, as it has struggled to increase revenues and cash flows over the last few years.
While recent data indicates a significant increase in revenue (i.e. 14.7% increase in the most recent quarter on a year-over-year basis), the company will still need to find a solution to its struggling organic business.
As illustrated in the chart above, the company’s revenues have largely stalled over the last four to five years, with income and operating cash flows experiencing turbulent dips and bounds in the last two.
It is now evaluating various ways of monetizing its massive user base both on mobile and desktop, and the launch of the Daily Fantasy app is expected to play a role towards achieving that goal. With advertising revenue stagnating, perhaps it is about time the company added new ways of generating income into its revenue streams.
What impact can the Daily Fantasy app have on Yahoo?
Fantasy sports betting is one of the emerging markets in real money gaming in the U.S., with estimated market valuation of $2.6 billion this year in entry fees. The market is expected to have a CAGR of about 41% through 2020, which will bring its annual figure to $14.4 billion. As such, Yahoo! is seizing an opportunity that could be hugely rewarding in the coming years based on its massive user base.
In the U.S., fantasy sports betting is legal in 45 states with Iowa, Arizona, Washington, Montana and Louisiana the only ones that Yahoo! does not expect to register players on to its new Daily Fantasy app. The legalization of fantasy sports betting is purely based on the fact that it involves some level of skill to win, thus it is not just about chance. On the other hand, the real sports betting business is more or less reliant on chance.
Now, currently, Yahoo! dominates the season-long/annual fantasy sports betting events, but the daily fantasy sports betting business is the bigger of the two main sections in the market. Therefore, the company faces the challenge of marketing its new service to its existing and new members.
The current market leaders in daily sport betting in North America are DraftKings and FanDuel (backed by NBC [NBC] Sports and Comcast [CMCSA]). Yahoo! has started its differentiation campaign by setting up a salary cap of $200, which also resonates well with the season-long players, and plans to get most of its Yahoo! sports website users to use the Daily Fantasy app.
The company boasts nearly 100 million users on its sports portals, and players are expected to pay as high as $500 when registering in various contests, although most of the contests are either free to enter or require a registration of just a few dollars. Yahoo! will be taking 10% of the amount paid by players when registering.
Based on the earlier stat of $2.6 billion paid in entry fees for 2015 (estimated) and about 56 million to 60 million players, this translates to about $45 in entry fees per player this year. Given the 10% Yahoo! would be taking from registration, this would mean that the company will be getting $4.5 per player –Â that’s 4.5 times what Facebook (FB, Financial) makes from every WhatsApp user.
Yahoo!’s season-long fantasy sports betting currently has about 7 million subscribers, so assuming the company can add twice this number to its new Daily Fantasy app by the year 2020, then we could be looking at a subscriber base of about 20 million overall for the company. This would result in annual revenue of about $90 million based on the current revenue per subscriber rate. The introduction of PayPal (PYPL, Financial) as a payment method is also likely to entice more players into participating in premium contests, which attract higher payouts.
However, it will all depend on how the company can market this new service and what sort of pay-to-play contests will be available to subscribers.
Yahoo! price and valuation
Yahoo! currently trades at about $34 per share, which is a massive rebound following its recent low of $27 per share. However, the current increase in price may be misinterpreted as a sign of strength with the overall trend suggesting otherwise.
Shares of Yahoo! are currently down about 35% from a multiyear high of $52.62 per share that was achieved in November last year. The rally that took the stock to these new highs came following Alibaba’s (BABA) IPO, where Yahoo! had a sizeable holding before cashing out part of its stake to the public via the IPO.
Assessing valuation using the P/E ratio may not be the right move to make at this time given the fact that the uptick in EPS witnessed over the last 12 months is very much a case of off-balance sheet items. The better assessment would be to use sales, in which case a P/S ratio of 6.47x compared to industry average of 6.83x values the company more or less in line with peers. Google, which is now Alphabet Inc. (GOOG, Financial), (GOOGL, Financial), has a P/S of 6.52, so the picture is clear.
However, the giant search engine’s business model is far better and promising in terms of outlook as compared to Yahoo!, which in this case makes Yahoo! an expensive stock.
Conclusion
With Yahoo!’s advertising revenue slowing, the company has to find new streams of income to augment its stagnating organic business. The daily fantasy sports app will help towards this goal through monetization of the company’s sports platform users, which are estimated at about 100 million.
The good news is that Yahoo! has massive cash on its balance sheet, $5.82 billion based on recent quarter results, and this will help it during this period. The Daily Fantasy app’s impact on revenue is likely to be small at the beginning but significant in the long term, and the latter is in the perspective investors should be taking while investing in Yahoo!.
