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The future of sports betting is being waged in tiny strip malls on the edge of New Jersey. Experts say daily transactions from rabid bettors there outpace Las Vegas. It’s the ultimate digital transformation. Glamorous multimillion-dollar West Coast casinos are being disrupted by smartphone apps, secure internet connections, and convenience. The trend is a boon for DraftKings Inc. (DKNG) and Penn National Gaming (PENN).

That assessment might seem like a push, to use the vernacular of the betting world. However, investing in the digitalization of gaming carries important caveats. Valuations have skyrocketed as analysts assess the size of the total addressable market. The pie is certain to grow as revenue-hungry states rush to legalize sports betting.

The New Jersey story is interesting. According to reporting from the Basketball News, about 25% of the bettors are New Yorkers. They are scrambling each day to Fort Lee in New Jersey, East Rutherford in New Jersey, and the Meadowlands — a sports complex in New Jersey — to place bets using smartphone apps.

The granularity of smartphone wagering is a big draw. The software is capable of instantly assigning betting odds for the most obscure occurrences. Gamblers have never had so many options at their fingertips, literally. A few taps and swipes on an iPhone or Android is all it takes.

New Jersey coffee shops are busy now because wagering on sports is still not legal in neighboring New York. Smartphone location tracking will not allow bettors to download the app, let alone lay down action -- but this is changing all over the country. Sports betting is currently legal in 24 states, although New York could come online sometime this year. Betting legislation is pending in five more states, with even more likely to be folded in 2022 and 2023.

In Georgia, team officials at the Atlanta Braves from MLB, the NFL’s Atlanta Falcons, and the Atlanta Hawks of the NBA have petitioned state lawmakers to legalize sports betting. Pro-sport executives expect to collect billions from licensing fees.

DraftKings and Penn Gaming are both vying for a piece of the growing smartphone business. It might seem like they face an uphill battle trying to beat established gambling organizations online, but that’s not entirely true. The upstarts have better on-boarding for new users. They also have better technology.

DraftKings acquired SB Tech, a British software developer in 2019. The $3.3-billion buyout married cutting-edge risk management and odds-making tools with sophisticated algorithms for a barrage of nonstandard, in-game bets.

The rise of Penn is more organic. The Wyomissing, Pennsylvania-based company purchased 36% of Barstool Sports in January 2020 for $450 million. Barstool is a sports betting media company without equal. Through sketch comedy and an irreverent social media presence, the company attracted 66 million monthly active users. When the Barstool Sportsbook app debuted in Pennsylvania in 2020, it attracted 48,000 users in the first month. Company managers noted that the annualized take from betters is $720 million.

The connection between New Jersey parking lots and sports betting might appear unseemly, but investors should understand online gambling companies are transforming the sector with unique digital assets. The shares of both DraftKings and Penn have come under pressure recently. Longer-term investors should consider using these pullbacks as a buying opportunity.