Goldman Sachs Downgrades Entain Twice in Double Blow

Entain (OTC: GMVHF) experienced a negative turn late this Monday when the gaming stock endured a double downgrade by Goldman Sachs. The bank lowered its rating on the Ladbrokes owner to “sell” from “buy,” skipping over the “hold” rating entirely. In addition, Goldman slashed its price target on the company by 43.4%, admitting that it has been wrong on the struggling stock.

Goldman cited several reasons for the downgrade, including softness in Entain’s online business and increasing competition. The operator had previously pointed to these factors as reasons behind a slack 2023 net gaming revenue forecast. Other issues mentioned by Goldman as contributing to the downgrade include good fortune by bettors in the third quarter, regulatory issues, and the operator’s recent $729 million payment to settle bribery allegations.

In addition, Ben Andrews, a Goldman analyst, also revised 2024 and 2025 earnings-per-share (EPS) forecasts downwards. He expects Entain’s pro-forma online growth to be negative in the fourth quarter of 2023 and the first half of 2024, only returning to positive growth in the second half of 2024.

It was also mentioned that the 50/50 joint venture between Entain and MGM Resorts International, BetMGM, is struggling, losing market share to DraftKings and FanDuel in the US online sports betting industry. Moreover, competition for the remaining market share is intensifying, with Bet365 expanding its US footprint and the recent entries of ESPN Bet and Fanatics into the market. This is leading Goldman to expect Entain and MGM to reinvest any 2024 profits generated by BetMGM back into the business.

The double downgrade by Goldman could fuel activist investors, Dendur Capital and Sached Heam Capital, who recently took large stakes in the stock. These money managers are making clear they are activists and they are pushing the Entain board to give a seat to Eminence Capital founder Ricky Sandler. They also want the board to allow Sandler to have a role in filling other director vacancies.

Additionally, Goldman’s mention of Entain’s weakening free cash flow position could further embolden the activist investors to push for a sale of the company, something Goldman acknowledges as the primary “upside risk” for the stock.