Sportsbooks ‘remain committed to California’ after ballot failure

Two propositions aiming to pass sports betting in California were voted down on Tuesday, but that isn't expected to stop sportsbooks from pursuing legalization in the Golden State.

“Our coalition knew that passing Prop 27 would be an uphill climb, and we remain committed to California,” Yes on Prop 27, a political action committee (PAC), told Yahoo Finance in a statement.

The “No” vote on both Proposition 26, which would allow in-person sports gambling on tribal lands, and Proposition 27, which would allow mobile sports gaming everywhere in the state, had largely been telegraphed for the past month by negative polling.

Still, the fact that sports gambling legalization came to a standstill in America’s largest state economy dragged gambling stocks down on Wednesday.

DraftKings (DKNG) stock lagged on the news Wednesday, sinking by roughly 7% as of the market close.

Other companies that donated to the Yes on Prop 27 PAC, including MGM Resorts (MGM), Penn Entertainment (PENN), and FanDuel’s parent company Flutter Entertainment (PDYPY) all tracked lower as well.

California 'a difficult market' given opposing views

Wall Street analysts who spoke with Yahoo Finance said they largely believe the propositions' defeats had already been priced into DraftKings stock prior to the company’s third-quarter earnings released on Nov. 5.

“Currently, over 30 states have now legalized retail or mobile sports betting, but California is and will remain a difficult market, given the different views in the markets,” Chad Beynon, senior analyst of gaming, lodging, and leisure at Macquarie Group, told Yahoo Finance in an email.

Jed Kelly, managing director of equity research at Oppenheimer, said that in the short term, he sees the "No" vote as a net positive for gambling operators like DraftKings, which has projected its first profitable year in 2024.

“I think it's good,” Kelly told Yahoo Finance. “Like OK, we kind of got two years of visibility. So it could be where DraftKings could show its profitability...If you're able to get EBITDA breakeven in '24 and you get '25 with more states that are cash flow positive you probably are self-sufficient to go into California when it legalizes. Because even when it legalizes, it's not going to be right away.”

He noted that in order to win votes, the legislation will likely need a higher tax rate than the 10% proposed by gambling operators.

There's another catch, according to Kelly and others with knowledge of the two campaigns, which is that tribes will likely need to be a part of the legalization process. While things can change, sentiment from that side doesn’t appear optimistic.

"We have to respect the will of the voters,” Jacob Mejia, the Pechanga Band of Indians vice president for public affairs, told Yahoo Finance leading into the election. "We have to discern what they're saying. To many of us, they're confirming what we've said for years, and that is: Voters don't support online sports betting. And so, tribal leaders will have conversations about what is next and we'll see.”

May 7, 2022; Louisville, KY; A fan makes a bet before the 148th running of the Kentucky Derby at Churchill Downs. Mandatory Credit: Jordan Prather-USA TODAY Sports
May 7, 2022; Louisville, KY; A fan makes a bet before the 148th running of the Kentucky Derby at Churchill Downs. Mandatory Credit: Jordan Prather-USA TODAY Sports (USA TODAY USPW / reuters)

Prop 27 ran advertisements during its campaign that irritated some of the tribal leaders. The ads flaunted that the legislation would help the tribes when in reality it would open up a profit share that doesn’t yet exist in California, where most gaming activities are only legalized on tribal land.

Three tribes publicly supported Prop 27 while more than 50 denounced it, according to the Yes on Prop 26/No on Prop 27 campaign.

“They must respect the single industry that has uplifted tens of thousands of Native Americans out of abject poverty,” Mejia added. “As long as that continues to be ignored, California will remain closed for sports betting. California is not a profit center.”

Still, some form of a mobile sports gambling push in California ahead of the 2024 election can be expected. DraftKings CEO Jason Robins has teased as much, and sources with knowledge of the campaigns confirmed those intentions.

At a high level, that legislation will likely bring both sides — the tribes and casino operators — closer together and model mobile sports gaming legislation similar to what’s already legal in other states.

Josh is a reporter and producer for Yahoo Finance.

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