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Morgan Stanley has forecast losses for major US operators as we enter Q1 reporting season due to a mix of aggressive state launches and low hold rates.

An avalanche of Q1 financial results will be published by Nasdaq-listed operators throughout April and May, beginning with Boyd Gaming Corporation later today.

The investment bank said investors should focus on each company’s ability to rein in marketing and promotional spend and assess how this could potentially set them on a path to profitability over the next 12 to 18 months.

US sports betting operators have racked up substantial losses to date as they battle to acquire customers and expand into additional states. Investors have been left asking when, if ever, these companies will turn a profit.

Caesars pledged to dramatically curtail its above-the-line marketing activity for its online sportsbook after Q4 earnings season, although Morgan Stanley is still guiding to digital division losses in excess of $500m for Q1.

The brokerage expects to see the US market turn EBITDA positive by 2025, which is not currently reflected in the share price of major players, according to MD Thomas Allen.

In Q4 for example, Rush Street Interactive reported a $37.1m net loss as BetMGM reported an operating loss of $56.9m, while Penn Interactive generated negative EBITDAR of $5.9m.

Indeed, Q4 rounded off a year of losses for some US market leaders, including FanDuel, which recorded a 2021 operating loss of £289m, and DraftKings, where annual net losses surpassed $1.5bn.

Morgan Stanley said it expects a similar story in Q1 2022, primarily driven by aggressive marketing costs to cover new state launches in New York and to a lesser extent, Louisiana.

Low hold rates are also expected to impact the bottom line. Using New York’s sports betting market as an example, FanDuel, which leads the ranks in terms of handle at $2.1bn, has generated just $143.9m in revenue since January.

The Canadian province of Ontario is also expected to play a pivotal role in operator Q1 reports according to Morgan Stanley, having gone live with regulated iGaming on 4 April.

Penn National Gaming is a frontrunner in Ontario via its theScore subsidiary, which has an established media presence in Canada and went live with theScore Bet sportsbook on day one.

“While we had been concerned about theScore’s ability to take sports betting/iGaming market share in Canada, our recent proprietary analysis suggests that it is the market leader in app downloads, attractive given that we believe investor share expectations have fallen significantly,” said Morgan Stanley in a note to investors.

“Assuming Penn achieves just ~6.75% market share in both US and Canada for sports betting & iGaming, Penn’s core business is trading at just 5.6x 2023e EBITDA versus its historical average of 7.5x.”

Morgan Stanley has therefore upgraded Penn’s stock to overweight, although it is lowering all price targets to reflect higher interest rates, the market de-rating and updated estimates.

“We last published the majority of our models post Q4 earnings in early Feb, when the S&P 500 was trading at 20.0x NTM P/E; it is now at 18.6x,” said Morgan Stanley. “On average, we lower our multiples by 4%.”

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