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The revenue model of Betting stocks is different to any other industry and can confuse even the most seasoned analysts.
In this article, we recap just how they work.
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How do betting stocks generate revenue?
Betting stocks use a variety of business models to generate revenue. There are four in particular.
The most common model is based on the house edge, where the casino maintains an advantage over the players and earns money through a percentage of bets placed.
In this model, the casino takes in more money than it pays out, and its overall profit increases with the amount wagered.
Another popular business model used by betting stocks is commission-based gaming. In this system, the company collects a fee for every bet made or item purchased. This fee is typically around 5% to 15%.
It provides an incentive for players to play, as they get rewarded for doing so, and it helps make up for any losses incurred from unfavourable odds or bad luck.
Gambling companies also use bonus systems to attract customers. These bonuses can come in various forms – such as free spins on slot machines or additional chips for poker – and help entice players into playing more.
Bonuses are also used to reward existing customers for their loyalty and encourage them to stay with a particular casino or site.
Finally, some gambling companies may utilize affiliate programs or advertising campaigns to generate revenue. Through these channels, they receive payments when users sign up for their platforms or click on ads that link back to their sites.
Affiliates can get one-time payments, recurring payments, or revenue shares based on how successful the referral program is at attracting customers who spend money on the platform.
The Net Gaming Win metric
You’ll commonly hear ASX betting stocks use a metric known as Net Gaming Win.
This alludes to the money that a betting stock makes after subtracting their costs from the money made from people playing games.
It is important to note that this is not the same as profit because it doesn’t take into account non-operational costs such as marketing.
So while PointsBet (ASX:PBH) made a $103.4m net win in the three months to December 31 2022, its cash burn was $75.5m. This was not only due to higher marketing costs but because a higher proportion of its turnover was coming from sports bets as opposed to higher-margin racing bets.
PointsBet’s exit leaves Light & Wonder (ASX:LNW) as the best way to gain exposure to the US betting market. It uses AEBITDA as its preferred metric – which stands for Adjusted EBITDA, along with Average Revenue Per Daily Active User.
The bottom line here is that gambling companies operate differently to other companies. It is crucial that investors considering an investment in them understand just how they work.
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