TheChek News Flow

The popularity of "parlays" means fatter profits for sites, even as gamblers pare spending.

Americans have found a creative new way of losing money at sports betting. They’re losing with such regularity that they’re catapulting gambling apps to profitability well ahead of schedule.

Parlay bets, which allow people to wager on several things happening together, have taken off in popularity this year. Instead of simply gambling on the winner of a game, bettors can wrap predictions for every game on the schedule into one bet, or create custom wagers that their favorite quarterback will throw three touchdowns and the defense will sack the other quarterback twice. Sports-betting websites and apps are now offering thousands of bets a day and combining the outcomes of several sporting events together into megabets that could cover four years of college tuition if they pay off. They hardly ever do.

In Illinois, which releases the most specific data about betting activity, parlays now account for more than 60% of the total number of online sports bets that people make each month and more than 27% of the money wagered, up from 20% two years ago.

That shift is no small matter to the two biggest sports gambling companies, DraftKings DKNG 5.91% (ticker: DKNG) and Flutter Entertainment FLTR -2.58% (PDYPY), the owner of FanDuel. Parlays have allowed them to make much more on each wager. The companies don’t regularly release details on just how profitable parlays can be, but a Barron’s analysis of data released by state gambling regulators shows that the companies’ average “win margin”—the amount they keep from bets—is about 20% on those bets, versus 5% for a standard bet on a single outcome in baseball or football.

Those growing margins help explain why DraftKings stock is up 150% this year and Flutter has climbed 36%, more than twice as much as the broader market. A year ago, analysts projected that DraftKings would eke out its first adjusted annual profit in 2025. Since then, Wall Street has accelerated that timeline by a year. Flutter earned its first adjusted profit in the U.S. in the first half of 2023, six months ahead of expectations. Its earnings per share are set to double this year from 2022 levels.

In all, parlay bets are giving new life to America’s sports betting craze. A Supreme Court decision in 2018 opened the door to sports betting, though it left it to individual states to decide whether to legalize it. Seven states joined Nevada in approving sports betting that year, though only five of them allowed it online. Since then, 38 states and Washington, D.C., have legalized sports betting, with 24 of them allowing it online. Gross revenue for the operators hit $7.5 billion in 2022, according to the American Gaming Association. Several analysts think further state legalization—California, Florida, and Texas still aren’t on board—and innovations like parlays can eventually lift the market to $30 billion or more.

Unlike the last time DraftKings and Flutter stocks rose sharply, in 2021, to levels they still haven’t topped, the latest surge is justified. The runway to consistent profitability for DraftKings, which has a market value of $13 billion, now looks more clear. Dublin-based Flutter, worth $32 billion, has likewise cemented its position at the top of the U.S. gambling ranks. The companies are relying less on relentless marketing—TV ad spending by online sports betting companies was down 49% in the second quarter on an annual basis, according to Nielsen, and DraftKings reduced its marketing spending in the latest quarter by more than 10% in established markets.

Even without mergers, the top two players have made their products so attractive to bettors through parlays and better technology that they accounted for 71.9% of the market for the year ended in May, up from 62.5% the year before, according to Eilers & Krejcik Gaming.

Competition remains fierce in theory—most states have more than a half-dozen players competing—but not so much in practice. Established casino companies like Caesars Entertainment (CZR) that made a splash in the market two years ago have gradually lost share. Even ESPN’s announcement this past week that it will partner with Penn Entertainment PENN -6.41% (PENN) in sports betting looks unlikely to shake up the market. While ESPN, part of Walt Disney DIS -2.99% (DIS), is a marketing behemoth, marketing alone no longer moves the needle in sports betting. The top companies excel in technology above all else, and there’s no evidence that ESPN’s involvement will make Penn better in that arena. “Even a brand as powerful as ESPN is unlikely to radically alter PENN’s likely trajectory,” wrote Citigroup analyst Jason Bazinet.

No matter who dominates the industry, parlays are bound to proliferate, simply because they’re so popular and lucrative.

Las Vegas has always made money from Americans’ desire to get rich quick, but this is different. Casinos can’t suddenly make blackjack four times as profitable for themselves, the rough equivalent to what online companies are doing today.

The gambling companies are quick to point out that this is no scam. There’s no extra card up the dealer’s sleeve. Parlays have worse odds of paying off for bettors because they supersize the odds of the whole bet, not because the odds are inherently more tilted toward the house. Betting on three or four things to happen, or even 10 in some cases, stacks the odds of each outcome on top of the others. That’s how a 4% to 5% edge for the casinos can become 20%.

“It’s increasing the volatility—it’s actually not making the odds worse,” said DraftKings CEO Jason Robins in an interview. “It’s equivalent to if you made a bet, and then you took those winnings and you reinvested in another bet.”

Parlays play on a risk-taking mentality that has emerged since the pandemic in markets well beyond Las Vegas. Robinhood Markets (HOOD) capitalized on that trend to sign more new brokerage customers in one year than any company had before.

“It’s the same thing as crypto, the same thing as options trading, this get-rich-quick type of mentality that a lot of retail investors and bettors have,” says Alex Monahan, who worked as a financial trader at Susquehanna International Group before he co-founded a website called OddsJam that allows users to compare odds across brands.

In sports betting, parlays capture that all-or-nothing mentality better than any other product. A $10 parlay can lead to thousands of dollars in winnings.

“It’s almost like playing the lottery,” says Jon Chim, a 34-year-old web designer from Long Island who likes betting on football and basketball parlays, sometimes putting together bets with as many as 10 different legs. “You can bet as little as a dollar, and you can 10x your money.” Some people win a lot more than 10 times. One bettor successfully picked the outcome of 23 college basketball games last year, turning a $1.10 wager into $532,000. Those kinds of payouts are their own form of marketing—FanDuel featured the bet in its Twitter feed, announcing that “this is what dreams are made of.”

There’s entertainment value, too. Chim says that he has been watching more sports since betting was legalized in New York last year. “When there’s money on the line, you’re definitely more excited for the game,” he says.

For the gambling companies, the rise of parlays comes just in the nick of time.

The latest state data show that the total amount of money people are wagering in several key states is starting to decline this year—the first sign that there’s a limit to how much Americans will spend on sports betting. In every one of the eight states that legalized online sports betting before 2020 and had up-to-date statistics, people are spending less on sports gambling this year than they did over the same period last year. In those states, the total amount wagered this year is down 8% on average from last year’s levels.

That is a clear warning sign that sports gambling companies will need a second act, now that simply placing a bet has lost its novelty.

Parlays are a key part of that second act. They’ve allowed the gambling companies to keep growing their revenue even as consumers spend their money on other diversions. In fact, in all of those eight early states where gamblers are now spending less money, the apps still took home considerably more revenue, an additional 24% on average, from the first half of 2022 to the first half of 2023. Detailed stats from New Jersey show how. Parlays jumped from 20.7% of the total money wagered to 24.3% over that period, and the win margin on parlays for the platforms rose from 16% to 20%.

One big reason that parlays have become so prominent now is that machine learning and artificial intelligence allow gambling apps to set odds on thousands of possible outcomes instantaneously in a way that lets people bet on their favorite players while limiting the potential losses for the house. Computers that can quickly crunch stats and play through possible outcomes make it more manageable to price those risks.

Robins of DraftKings says that the company still needs employees to watch games and news reports. Bettors who, for example, learn about a player’s injury can profit if they make a wager before the gambling apps change their odds to take the injury into account. But AI will make the process even more efficient, and vastly expand the number of bets available. Robins says that same-game parlays will become increasingly customizable so a bettor can create his or her own bets. “Over time, that will become more model-driven and more machine-driven,” he says.

Like other AI-driven technologies, it’s difficult to determine what makes one parlay more successful than another. Citi analyst Monique Pollard says that FanDuel has outperformed its competitors both in terms of how many of its customers play parlays and how profitable the bets have been for the company. Illinois data show that 72% of total bets at FanDuel this year have been parlays, versus 54% at DraftKings. And FanDuel’s win margin was 24%, versus 17% for DraftKings and 11% for BetMGM, another rival.

Pollard gives two reasons for FanDuel’s particular success. The platform’s parent company, Flutter, has a long history of pricing sports bets overseas, giving it extra data about which kinds of bets are most attractive. And it has been offering daily fantasy sports in the U.S. for years, giving it unique insight and data into U.S. sports markets. “Each of the other operators only has one of the two things,” she says.

DraftKings has been catching up, though, boosting its percentage of parlays and market share. In the 12 months ended in May 2023, DraftKings’ market share was 27%, up from 23% a year before, according to Eilers & Krejcik Gaming. Looking at just the three months leading into May, its share hit 30%.

DraftKings’ race to profitability has convinced more analysts that the stock is worth owning, even after its strong run this year. Truist Securities’ Barry Jonas upgraded his rating to Buy this week, arguing that the stock deserves a multiple more in line with tech companies that are using AI to transform their industries. At a multiple of 22 times its 2025 earnings before interest, taxes, depreciation, and amortization, or Ebitda, up from 14 times now, DraftKings would trade at $44, up from a recent $28, Jonas wrote. Eventually, he thinks that players could get tired of losing parlays, but he doesn’t see that happening soon.

Parlays have some detractors. Illinois gambling lobbyist Steve Brubaker conducted a test this year where he played one same-game parlay that FanDuel advertised on its home page for 50 days, and lost all but one of them. He posted the results on Twitter, called the product “predatory,” and urged regulators to investigate. Flutter declined to comment to Barron’s on Brubaker’s claims, but a company representative told Casino.org that the bets Brubaker played were mostly from a part of the app that features parlays created by other players, not the company. The Illinois Gaming Board didn’t respond to a request for comment on whether it is investigating parlays in light of Brubaker’s claims.

Parlays also face scrutiny for other reasons. As with other gambling products, researchers are watching whether parlays are more likely to lead to problem gambling behavior, such as needing to progressively bet more to get the same thrill, or relying on other people to pay debts. Since the start of legal online betting, there’s evidence that more Americans are experiencing problematic behaviors. A survey released by the National Council on Problem Gambling found that the percentage of respondents reporting at least one of four problem gambling behaviors “many times” rose from 7% in 2018 to 11% in 2021, an increase that would represent eight million people if extrapolated across the U.S. population.

Keith Whyte, the executive director of the NCPG, says he isn’t aware of specific research into parlays. But based on other research into problem gambling, he thinks that same-game parlays in particular could be problematic. “They combine [the] lure of small bet/large payout with perception of skill since they are related to sports outcomes,” he wrote.

Robins says that DraftKings and other operators are honing their computer and human models to detect problematic behaviors. “We have special teams trained on how to intervene if they do get somebody who’s flagged,” he says.

Parlays now account for about a quarter of the money that gamblers are wagering, and Robins sees substantial growth ahead. “I think there’s probably still a lot of really cool product stuff that we can do that will generate higher parlay mix,” he says. “But where it can go long term—is it 40%, is it 50%, is it more—I think it’s too early to say.”