Flutter reported phenomenal second-quarter earnings this week, surprising investors and boosting shares about 8% on Wednesday as the company's FanDuel betting platform captures market share and dramatically increases revenue, including in states well-established with sports betting and online gaming.
But what caught the eye was the statement that FanDuel would not add a surcharge to offset a tax increase in Illinois. Earlier this month, rival DraftKings said it would introduce a surcharge for consumers in states where taxes on sports betting are higher.
DraftKings shares initially fell 5% in trading after FanDuel launched, and shortly afterward the company reversed its stance on taxing customers. DraftKings shares rose more than 2%.
“We always listen to our customers and, after hearing their feedback, we have decided not to move forward with the gambling tax surcharge. We are always committed to providing the best value in the industry to our loyal customers,” DraftKings said in a statement.
The nominal tax would have applied to customer winnings in states with multiple operators that have a tax rate above 20%, including Illinois, New York, Pennsylvania and Vermont. Illinois passed a 40% tax rate for gambling companies with the highest adjusted gross revenue. New York and New Hampshire each maintain 51% tax rates for sports betting companies.
DraftKings was the first operator to announce such a fee for users, but its CEO Jason Robins predicted that other sportsbooks would follow suit.
Neither Penn Entertainment neither Rush Street Interactiveoperating sportsbooks in Illinois followed suit with the surcharge.
FanDuel said Tuesday it would also waive the surcharge and instead offset the impact of high state taxes with promotions and marketing more tailored to local needs. The company expects a net impact of $40 million in the second half of 2024.
A sign hangs on the wall of the reception area of the offices of Fanduel Inc. in Edinburgh, Britain, Tuesday, Feb. 7, 2017.
Chris Ratcliffe | Bloomberg | Getty Images
Peter Jackson, CEO of Flutter, FanDuel's parent company, said the Illinois tax increase could actually prove to be a competitive advantage.
“Smaller players may also have to increase their prices, which would lead us to capture a larger share, which provides us with an offset,” he said on the company's earnings call.
Gaming analysts praised DraftKings' decision to scrap its plans to apply a surcharge.
“We view the decision to remove the surcharge as a positive for the story, as users were disappointed with the company's initial decision,” Piper Sandler analyst Matt Farrell wrote in a note.
Truist analyst Barry Jonas said: “The reversal should remove some uncertainty around execution risks (including market share and/or reputational impact), but it also raises the question of how DKNG can offset the impact and/or whether guidance needs to be adjusted.”
FanDuel holds a 47% market share of the U.S. sports betting market based on gross gaming revenue. It has also achieved and maintains a leadership position in iGaming, or online casino gaming, with a 25% market share based on gross gaming revenue.
Competition is tougher and fiercer in iGaming because profits and future growth far eclipse sports betting.
According to the American Gaming Association, during the first five months of 2024, operators reported $677 million in iGaming revenue in just seven states where it is legal. For comparison, sports betting revenue totaled $1 billion in the same period across 38 states and Washington, DC.
And a new report from game maker Light & Wonder and Vixio estimates that annual gross gaming revenue would be $48 billion if every state that currently allows land-based casinos or sports betting allowed iGaming.
The gaming industry appears to be ignoring recession concerns, even as many other consumer-dependent businesses report reduced spending.
According to a CNBC/Generation Lab survey, 9% of people aged 18-34 say they spend at least $100 a month on online gambling. Three percent of people spend more than $300 a month on online gambling.
The sports betting exchange-traded fund, Betrose 2% on Wednesday, its third consecutive daily gain and its best day since January.
DraftKings shares are down about 9% so far this year, while Flutter shares are up nearly 15%.
