Despite ongoing regulatory challenges and slowing growth in betting volumes, the US online gaming industry is poised to deliver a strong Q2 2025, partly driven by improved sports betting margins, according to Citizens Capital Markets and Advisory.
In a recent note, Citizens highlighted that Q2 earnings for online gaming companies are “looking good,” with the quarter potentially marking the best-ever performance for gaming margins.
This optimism comes amid a backdrop of persistent pressures, including higher taxes, subdued handle growth, and regulatory uncertainties that have weighed on the sector for much of the past year.
“The online gaming sector has been plagued by a long list of negative headlines, including higher taxes, slowing handle growth, a lack of state legalisation, a lack of confidence around hitting financial targets, regulation, etc., while coming at a time when bad sport outcomes have resulted in negative estimate revisions in four of the last five quarters,” Citizens said.
However, despite these headwinds, the sector has shown remarkable resilience, with online gaming stocks up an average of 15% year-to-date — outpaced only by the cruise industry among consumer discretionary sectors.
Margins shine
Sports betting margins, which were often a pain point for operators in past quarters due to bettor-friendly outcomes, are expected to emerge as a bright spot this quarter.
“The shift in sentiment began in May when game outcomes finally moved in a positive direction, resulting in the best quarter ever for game margins.
“On one hand, handle growth slowed for another quarter, slightly worse than expectations (DKNG: mid-single digit; FLUT: high-single digit), but gaming margins more than offset slowing handle, resulting in positive estimate revisions across that segment for exposed companies.”
Handle growth
Looking forward, Citizens projects handle growth to accelerate into the mid-double digits during the second half of 2025, compared to mid-single digits in recent quarters.
The upcoming NFL season, which begins in September, is expected to play a pivotal role, particularly given the traditionally high parlay betting hold during Q3, averaging 18.4%.
“We believe in-line game outcomes should be enough for investors to see further upside for the online gaming companies,” the analysts said.
During the upcoming earning calls, renewals of sports betting partnerships with the NFL are expected to attract attention. Caesars, DraftKings, and FanDuel have agreements expiring soon.
Caesars has indicated it won’t renew its deal, but new arrangements are anticipated to reflect the growing importance of sports betting to the league.
Regulatory uncertainty remains a key theme, with questions about the potential impact of the FAIR Bet Act and the so-called “One Big Beautiful Bill” on operators and customers.
“We would expect companies to downplay the longer-term impact,” the analysts said.
Meanwhile, the possibility of legalised prediction markets is being monitored cautiously.
“It would not be a public call if companies did not have to answer questions around the roadmap if and when prediction markets are legalised in the United States.
“We believe companies are in a wait-and-see mode for the path forward, yet look to be opportunistic if the CFTC rules in favour of the product,” the analysts said.
Top picks
Citizens analysts identified Flutter Entertainment as a top pick for its dominant US market presence, broad international footprint, and robust balance sheet.
Genius Sports was highlighted for its strong capability to monetise sports rights, while Super Group was noted for its localised expertise and upcoming growth catalysts.
Elsewhere, Morgan Stanley recently highlighted DraftKings as a likely standout in Q2 2025 earnings, with analysts projecting a significant beat fuelled by strong online sports betting performance and accelerating iGaming revenue.
