Good morning! Today’s word count is 2,002 words, or a 10-minute read. Let’s get to it:
Market Summary (11:10 A.M. ET): “Dimming prospects for a stimulus package before the November election and fresh restrictions across Europe weighed on sentiment, dragging stock markets lower,” WSJ writes.
- S&P 500: $3,462.62 (-0.75%)
- Nasdaq: $11,645.07 (-1.05%)
- Bitcoin: $11,384.37 (+2.96)
- Gold: $1,897.40 (-0.52%)
- U.S. 10-Year: 0.713%
Justin Oh’s Daily Read
Read No. 3 for my thoughts on DraftKings stock ($DKNG) today.
In general, it is still very unclear how fast the online gambling industry will grow in the United States. It’s something that relies not only on the return of sports but also on the legalization and popularization of online betting. If you really like the trend and want to hold for the long-term, you could always buy a niche ETF like $BETZ.
But my concern is there are definitely significantly overvalued companies embedded within the online gambling industry, such as $DKNG and the whole industry seems overvalued considerably in general. Equity research shows me that the sports betting industry’s total addressable market (TAM) could be $20-25 billion, but it will take a long time to get there if it even is ever achieved.
I don’t like investing in this industry after the huge retail investment wave has pumped up valuations. I believe this industry is one of the most vulnerable sectors to take a beating.
Once people realize…
- The TAM isn’t actually that large, and the space is already hyper-competitive
- Per capita spending data isn’t suggesting that the industry TAM will double, as some have suggested
- Very few states at the moment are even considering iCasino legislation, and not much has actually changed with legislation since 2018
… it could mean some rough times for most of these stocks.
Amazon Expands NFL Coverage With Playoff Game
Amazon has reached a deal with the NFL to stream one playoff game this season, WSJ reports.
Deepening Ties: Even with the 11 Thursday Night Football matchups it already streams annually, Amazon has been interested in broadcasting more football. Earlier this year, the tech giant spent around $225 million to renew its Thursday Night Football deal for the next three seasons.
Amazon will get to stream the new Jan. 10 wildcard game, which comes as part of the NFL’s newly expanded 14-team playoff.
- The terms of the deal weren’t disclosed. But CBS paid $70 million for multi-platform broadcast rights to the same game, and NBC Sports spent $75 million for the second new wildcard game.
A Challenging Year: The agreement comes as the NFL continues to dodge a minefield of Covid-19 troubles. Virus outbreaks in the Tennessee Titans and New England Patriots organizations have forced the league to shuffle its schedule (Tuesday Night Football!) as it tries to stay on schedule and finish the regular season in 17 weeks.
- TV ratings are down slightly this year, which the league attributes to the combination of the presidential election and Covid-19.
- However, football still dominates the ratings, owning 18 of the top-20 most-watched telecasts since the league kicked off in mid-September.
Virus or not, the league is focused on “striking new long-term agreements with its media partners including CBS, NBC and Walt Disney Co.’s ESPN.”
- The deals don’t expire for some time, but negotiations are usually done in advance.
- The NFL has trended toward “slicing and dicing” its schedule to create additional revenue streams and “there’s anticipation” Amazon will pursue Sunday afternoon broadcasts.
We discussed how their end goal is to be the ubiquitous distribution network of all physical and digital products. This is an example of Amazon building its digital content distribution network.
Amazon has been dominant with physical products and has slain players like eBay ($EBAY) to become the dominant physical goods marketplace. And it’s now building out in-house distribution to compete with FedEx ($FDX) and UPS ($UPS); sellers are now using Amazon “FBA” to ship their products to customers.
The fight for the digital channel is still undecided and murky. Amazon, Apple iTunes and Google Play are neck-and-neck when it comes to marketplaces. And digital products are hard to come by since Netflix ($NFLX), Hulu, HBO ($T), NBC/Peacock ($CMCSA) act as their own exclusive marketplaces with exclusive content. The digital content market looks like it will have multiple winners that exist side-by-side, but we’ll have to watch and see if Amazon can impose its will.
DraftKings Strikes Media Partnership With AT&T’s Turner Sports
DraftKings is joining forces with AT&T’s WarnerMedia after agreeing to a media partnership with subsidiary Turner Sports, CNBC reports.
From The Press Release: “Under the arrangement, DraftKings will provide sports betting information and daily fantasy content across Turner Sports telecasts and Bleacher Report digital channels including the B/R app.”
- NBA content is not included in the deal, as Turner has a separate agreement with FanDuel to integrate content into its NBA broadcasts.
Ride The Hot Streak: The positive momentum continues for DraftKings, which made its public debut through a $3 billion SPAC merger in April and currently has a market cap north of $17 billion.
- The sportsbook and daily fantasy provider has secured several notable partnerships in the last few weeks, including the New York Giants, Chicago Cubs, ESPN and an equity deal with Michael Jordan.
Legalization Moves Forward: Since the Supreme Court overturned PAPSA in 2018, 18 states, including Washington D.C., now have online sports betting.
- Four more have passed bills to legalize but are not yet operational, and six are having active discussions on the subject.
DraftKings’ stock rose 17% following the announcement of its ESPN deal in September. Adding Turner to its arsenal gives the company access to broadcasts of the NCAA Men’s Basketball Championship and Major League Baseball.
Those of you that took a chance on DraftKings stock ($DKNG) after seeing my early YouTube videos on it in May, chances are you’ve done really well. Sports betting is clearly making progress into integrating with sports platforms, putting DraftKings and FanDuel front and center.
Although the headlines have been good, let’s gut-check ourselves on valuation. DraftKings only made $134 million in Gross Profit for the first half of 2020, not to mention they saw a decline during the second quarter due to sports being put on hold. Regardless, at a $17 billion Enterprise Value, $DKNG stock is trading at 126x run-rate Gross Profit, which is entirely too expensive to own.
Trump Administration To Consider Adding China’s Ant Group To Trade Blacklist
“The U.S. State Department has submitted a proposal for the Trump administration to add China’s Ant Group to a trade blacklist,” Reuters reports.
National Security Fears: Alipay, Ant Group’s payment app, is unavailable in the U.S., but Trump Administration officials are worried China could “access sensitive banking data belonging to future U.S. users.”
- China hardliners under Trump seek to deter U.S. investors in participating in Ant’s possibly record-breaking $35 billion dual-listing IPO in Hong Kong and Shanghai.
The Trump administration has used the “entity list,” which makes it harder for U.S. firms to sell high-tech items to blacklisted firms, as its preferred tool to levy sanctions against Chinese companies.
- Trump has mostly avoided more severe measures like freezing Chinese assets in the U.S., which “many attribute to Treasury Secretary Steve Mnuchin’s dovish stance on Beijing.”
However, the actual impact is questionable at times.
- Banning Huawei in 2019 dealt the Chinese telecoms giants a significant gut punch.
- The impact on Ant is more likely “symbolic” and does not prevent U.S. investors from purchasing its stock.
It’s unclear when the U.S. End-User Review Committee, the list’s gatekeepers, will review the matter. But blacklisting a firm seeking an IPO can make things tricky.
- Chinese AI firm Megvii Technologies had to delay their IPO after a U.S. trade blacklist designation shot down its Hong Kong listing last November.
- Ant’s IPO approval has been delayed already, as China’s securities regulator is probing a potential conflict of interest.
A technological trade war between the U.S. and China does not change my view on whether Ant Group, Alibaba ($BABA), and Tencent ($TCEHY) are dominant companies that will compound capital. Suppose you’re ethically amenable to investing in the continued growth of China. In that case, these stocks look possibly more dominant in China than Amazon is in the U.S., with analogous investment highlights.
We are vastly overweight in U.S. stocks because of the continued lead of the U.S. economy and monetary regime, as well as the increasing importance of U.S.-developed technology platforms. Furthermore, I can have a more in-depth familiarity and understanding of the U.S. economy and stocks in a way I cannot with, say, Indian or European ones. Be wary of those who casually throw out international stock ideas (or any stock ideas) without truly understanding the business’ products, economics, and popularity.
What’s Going On
Up In The Clouds: “Google Cloud has signed up Nokia to a five-year cloud computing agreement in which the telecommunications company will move its servers and applications running in private data centers to Google’s cloud services. In the cloud market, deals with companies that are ditching private data centers in favor of cloud services tend to get lots of attention, and Amazon Web Services and Microsoft regularly announce these types of customer wins. Google Cloud has been less vocal on this front, but the Nokia deal suggests that may be changing.”
Social Supervisor: “New York’s top financial watchdog said a dedicated regulator should oversee large social-media platforms, which should also be designated as systemically important, following a successful cyberattack on Twitter Inc. during the summer. The New York State Department of Financial Services made the recommendations Wednesday as part of a 37-page report about the July 15 attack in which a number of prominent accounts, including those of former Vice President and Democratic Party presidential candidate Joe Biden and Tesla Inc. Chief Executive Elon Musk, were used to promote a cryptocurrency scam.”
Banks Keep Rolling: “Morgan Stanley beat analysts’ estimates for third-quarter revenue and profit, fueled by better-than-expected results from the firm’s Wall Street trading operations. The bank said Thursday in a release that profit jumped 25% from a year earlier to $2.72 billion, or $1.66 per share, exceeding the $1.28 estimate of analysts surveyed by Refinitiv. It generated revenue of $11.7 billion, 16% higher than a year earlier and a billion dollars more than the estimate.”
Raise the Roof: Khosla Ventures is raising $1.1 billion for its latest fund, Menlo Ventures closed its fifteenth early-stage fund with $500 million, Brighteye ventures pulled in $54 million to back education-tech startups in Europe, Spain’s Savana Medica grabbed $15 million to turn clinical notes into structured patient information using machine learning, podcasting upstart Qcode netted $6.4 million in a funding round led by Sonos and South Korean startup Cochlear.ai collected $2 million “to detect the sounds missed by speech recognition.”
K-Pop Funds: “Big Hit Entertainment Co., the management company behind South Korean pop sensation BTS, made its market debut Thursday, capitalizing on the global buzz about South Korean pop culture and a local fervor for investing.”
Chasing Success: “Apple is playing catch-up in China with the launch of its first 5G-enabled iPhones, seeking to supercharge uneven sales in the company’s second-biggest market—where homegrown rivals dominate.”
Seeing Green: “Walgreens Boots Alliance Inc. posted stronger-than-expected results in its fiscal fourth quarter, as the drugstore giant continued to deal with the effects of the Covid-19 pandemic.”
Big City Departure: “WarnerMedia isn’t expected to move into its future Manhattan headquarters until later this year, but it is already looking to unload its stake in the brand-new building.”
Corruption Resolution: “Brazil’s J&F Investimentos, which controls the world’s largest meatpacker, JBS SA, put an end to a long-running legal dispute in the U.S. over bribes it paid in Brazil, agreeing Wednesday to pay $128 million to settle the case.”
Next Big Thing: “Stripe [is paying more than $200 million to acquire] Paystack, a startup out of Lagos, Nigeria that, like Stripe, provides a quick way to integrate payments services into an online or offline transaction by way of an API.”