How did gambling firms compare to stock market hotshots during Covid-19?

Now that the boards are coming off the doors of the local boozer, here’s a poignant pub quiz question. How many of the fabled FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) actually return dividends back to their shareholders?

Only one does – and arguably because it’s the only one sitting atop so much cash that it makes more financial sense to pay back shareholders to incentivise future investment. Most other tech stocks – and indeed a general growing trend in US equities – don’t remit capital back to investors; which raises the question as to whether stockowners actually own any part of these businesses at all, as opposed to simply placing structured bets on whether the price will go up or not.

This sentiment has become ever more tragi-comical in the months following the pandemic. Take tech stocks such as Bill and Shopify. Both companies are moderately well known, but have enjoyed huge (over)-valuation surges in the second quarter of this year, and are now trading at well over 50 times annual sales. To put this into perspective, Apple’s price-to-sales ratio is six. Adobe is currently below five.

What is this market folly? Prescient investment or another Dutch tulip bubble? For most balanced stocks at least, specifically those trading with reasonable price/earnings ratios, this seems like a sensible move.

The pandemic has understandably shifted working, buying and consumption behaviour to utilising more efficient (tech) means to deliver results, and in so doing the markets have favoured good-looking tech that gets the job done with minimal fuss. Which is why Zoom, Deliveroo and Netflix share prices have rocketed in the previous quarter.

So far, so Bloomberg. But this preamble is necessary to understand the main reasons (and as yet unfactored risks) why sports betting tech is enjoying a honeymoon period in the US.

Aside from the return of sporting events, and the ongoing (albeit glacial) state-by-state gaming regulation, US investment capital is still seeking refuge in equities it (thinks it) understands. And because four of the five most recent economic bubbles have had their epicentre in the US, and – specifically – in tech, these stocks always become a source of refuge in disruptive macro-events. Especially when the price-to-sales ratios for some of these gaming stocks is absurdly low in comparison to their tech brethren.

To fully understand this appeal, take a look at Evolution and GAN’s stock prices. Both companies’ PS ratios currently stand at 24 and 18 respectively, and they have received numerous ‘buy’ recommendations across various stock brokerages. In other words, the market generally assumes that such companies will continue to increase their share prices given the gradual return to stability of sports markets, as well as their tech appeal.

So, plucky investors would assume that these are the new defence stocks to hold for the long game. An even more ambitious move would be to buy Scientific Games and IGT – they have PS ratios that barely sit above zero. In other words, drunk-texting-ex-at-3am levels of impulsiveness.

A change of heart

However, as with all bubbles, this is a cyclical period. It is likely that sentiment can – and will – rapidly move against seemingly rational investments, and gaming stocks also risk getting caught up in this change of heart.

It’s widely acknowledged that the market is rapidly approaching another correction, likely to happen if/when a second pandemic wave brings commerce back to a standstill, including sports.

In analogous fashion, stocks that have also benefited from the first wave are unlikely to enjoy similar bounces. Put simply, consumers won’t be doubling their deliveries, downloads or conferences to each other.

The same narrative applies to gaming tech stocks, perhaps even more so given that some of the bigger players in this space are currently navigating some pretty leveraged mergers or acquisitions. In other words, prepare for quite a few tremors in the road during the months ahead.

Notwithstanding, the longer-term picture for US gaming tech looks broadly appealing. With gradual regulation and little of the socialist nonsense that is currently sweeping the European territories, it does make sense to hold well-grounded gaming equities (and particularly gaming funds) over a longer-investment horizon.

Just be prepared to weather a few (likely rough) storms in the meantime. And especially don’t try to time the market by calling the bottom (or top) of certain equities, no matter how lucrative a short position on Zoom may seem at the moment…

(first published at https://egr.global/intel/insight/market-watch-how-did-gambling-firms-compare-to-stock-market-hotshots-during-covid-19/)