Good morning! Today’s word count is 2,046 words, or a 10-minute read. Let’s get to it:
“U.S. share benchmarks rose, suggesting that the market may recover some ground following four consecutive weeks of declines. The VIX, a measure of expected turbulence in stocks, also ticked higher,” WSJ writes.
- S&P 500: $3,349.68
- Nasdaq: $11,070.71
- Bitcoin: $10,912.11
- U.S. 10-Year: 0.665%
Justin Oh’s Quick Read
Given how vital Big Tech is for almost any long-term investment portfolio, I’ve created a comparison chart for you today. As you see, Amazon is mostly a bet on them continuing to take more and more market share of e-commerce spending, with massive upside potential in cloud computing. Apple is a bet on consumer products and connected services. Google and Facebook are bets that they will grow and dominate public mindshare (or “eyeballs”) and increase advertising revenues. And Microsoft is an even bet on productivity software, cloud, and personal computing. You’ll also see that selling software is much more profitable than selling products, although products generally have broader Total Addressable Markets (TAMs).
Caesars Makes Multi-Billion Dollar Bid for U.K. Bookmaker William Hill
American hotel and casino operator Caesars Entertainment announced Monday it was in late-stage talks to acquire U.K. betting outfit William Hill. The proposed deal could be valued at $3.7 billion.
Why It Matters
Following legalization, sports gambling has a bright future.
- Since the Supreme Court overturned PAPSA in 2018, sports betting has become legal in 18 states and Washington, D.C. Four more have legalized it but aren’t operational yet, according to Axios.
- The U.S. online casino and sports betting market is expected to hit $18 billion in revenue by 2025, according to Macquarie Research. Caesars said, “the enlarged sports and online gaming business in the U.S. could generate between $600-$700 million in net revenue in full-year 2021,” according to CNBC.
- The casino and gaming industry has seemingly recovered since being struck by the Covid-19 pandemic. In March, the American Gaming Association estimated the mass closures of casinos would rob the U.S. of $43.5 billion in economic activity if it lasted eight weeks.
Caesars is buying its way into that emerging market.
- William Hill, which already has partnerships with ESPN and CBS Sports, already has a significant share of the rapidly expanding U.S. sports betting market.
- It handled $2.5 billion worth of wages and claimed to take one out of every four bets placed in the U.S. in 2019, according to Legal Sports Report.
- The U.S. has been one of the bookmaker’s most lucrative markets, accounting for 7 percent of group revenue in the first half of the year.
There’s another party interested, but a bidding war is unlikely.
- Apollo Management also submitted a takeover proposal.
- However, its bid is worth substantially less as Caesars and William Hill already have a joint venture that it has the right to terminate “in the event of an Apollo buyout.”
- Caesars said it completed its due diligence and expects a deal to be completed by the second half of 2021. It plans to fund the deal by raising equity and taking out $2 billion worth of debt against William Hill’s non-U.S. businesses.
Numbers To Consider
- Caesars stock opened at $54.85 Monday, with a market cap of $9.24 billion.
- Macquarie Research projects Flutter Entertainment (28 percent), DraftKings (20 percent) and Caesars (12 percent) to be the three top players in the U.S. casino and sports betting market by 2025.
Justin Oh’s Two Cents
Those of you who’ve subscribed to our content since the spring know that I generally like the online casino and sports betting trend as a long-term speculative one and liked DraftKings stock ($DKNG) around $30 per share as an early-stage bet. Covid-19 has undoubtedly convinced many that online betting will grow tremendously, but given the state-by-state legalization dynamics, how quickly it grows remains to be seen. $DKNG at almost $60 per share looks too pricey for me at this point. Still, Caesars Entertainment ($CZR) could be an attractive way to invest in the trend, especially after a high-profile ESPN partnership and if they purchase William Hill ($WIMHY). According to analyst estimates, $CZR trades at ~10x 2022 EBITDAR and a 9 percent Free Cash Flow Yield. If you believe the gaming industry recovers quickly and want some upside with iGaming, $CZR will provide great potential. But also take note that it, like its peers, has a lot of debt and could be very risky if Covid-19 or a weak economy hurts a gaming recovery.
Read More: (WALL STREET JOURNAL)
Amazon’s Late Prime Day, Now in October, Set to Fuel Record End to Year
“For years, Amazon’s annual Prime Day shopping extravaganza has pulled in sales during the lull of summer shopping. This year, it could help the company shatter its fourth-quarter earnings record,” WSJ writes.
Why It Matters
Prime Day has quickly become a valuable piece of Amazon’s e-commerce business.
- Amazon doesn’t disclose Prime Day revenues, but analysts estimate that it was more than $7 billion last year. The company sold more than 175 million items during last year’s event, more than Cyber Monday and Black Friday combined.
- Amazon Prime, which boasts 150 million members globally, has added around 50 million since 2018. Members get access to all of the Prime Day deals in addition to other benefits.
- Prime Day has become a mover in the industry. Around 200 retailers, including Walmart and Target, offer comparable discounts during the period to remain competitive.
This year’s event is a pandemic driven audible.
- Amazon initially rolled out Prime Day in 2015 to increase sales during a routinely slow summer period.
- While typically scheduled for July, Amazon opted to move Prime Day back due to overwhelming customer demand during the height of the Covid-19 Pandemic.
- Earlier this year, an internal email from an Amazon executive suggested the delay to Prime Day could cost the company between $100 million and $300 million from an “overhang” in device inventory.
The combination of Prime Day and the holiday season could cap off a record-setting year.
- The pandemic has driven record quarterly sales for Amazon. It sold $88.9 billion worth of items in its April to June quarter.
- Amazon is firmly on pace to explode past the $280.5 billion it made in sales last year.
- To meet the demand, Amazon is expected to expand its fulfillment square footage by roughly 50 percent this year and plans to hire 100,000 additional warehouse workers.
Numbers To Consider
- Amazon stock opened at $3,148.85, with a market cap of $1.58 trillion.
Justin Oh’s Two Cents
I expect $AMZN to have a monster 2020 that will see benefits even after the quarantine effects of Covid-19 are gone. Consumer spending hasn’t skipped a beat this year and has massively shifted towards e-commerce over in-person shopping. Amazon will continue to take more and more market share of all consumer purchases and increase the customer lifetime value of each Prime member. The only question is if they get big enough to be broken up by antitrust litigation. If you made me sell all my stocks except one, $AMZN is the one I would keep.
Read More: (WALL STREET JOURNAL)
Number Crunch: Postmates Got Offers From Two SPACs Before Uber Jumped In
Uber narrowly edged out a special purpose acquisition company in its deal to acquire Postmates.
- The SPAC had reportedly offered as much as $2.5 billion, just a shade lower than Uber’s $2.65 billion agreed-upon purchase price.
- Postmates’ revenue more than doubled in the first half of 2020, growing to $267 million from $131 million the year before. It also decreased its cash spending from $147 million to $84.9 million.
- A recent securities filing by Uber revealed, “Postmates management projected the company’s revenue would reach $909 million by next year and as much as $1.5 billion by 2023.” It also revealed that Uber had made a $1.9 billion offer for the company in mid-2019. Two SPACs also emerged with offers as Postmates planned an IPO before the pandemic upended the global economy.
Justin Oh’s Two Cents
Regarding the popularity of SPACs, this SPAC trend is a whiplash against the 10-20 year trend we’ve seen where private “startups” are waiting longer and longer to go public. When a very lucrative and high-growth company delays going public until it’s bigger and more-mature, retail investors miss out on much of the hyperbolic growth in returns by way of not being able to invest in it until later. But be warned that higher upside is almost always coupled with higher risk and that many of these early-stage, pre-revenue SPAC companies will fail. Still, a few may be smash hits that make up for the rest (see Peter Thiel’s explanation of the “Power Law” in venture capital).
Regarding Uber and Postmates, I’ve read many research reports about how $UBER is undervalued and doing well, which could be the case. But in my opinion, Uber, Postmates and their peers are some of the weaker forms of networks. Taxi rides and food delivery are so commoditized that most users have all the apps on their phones and compare prices in real-time. DoorDash’s partnership model is smart and provides a competitive advantage in that sense. But these companies are not my flavor of “high growth, high ROIC companies that will dominate for the next 10-20 years.” They’re locked in a perpetual knife-fight with each other, and I worry how these companies will fare when autonomous driving and delivery becomes a reality.
Read More: (THE INFORMATION)
On The Margins
Tok Keeps Ticking: “A judge blocked the Trump administration’s order to bar new downloads of TikTok just hours before the ban was set to go into effect late Sunday. In a court filing Sunday evening, U.S. Federal Judge Carl Nichols, a Trump appointee, ruled to grant TikTok’s request for a preliminary injunction against the White House. The ruling effectively delayed a decision on TikTok’s fate until a November 12 deadline that would ban the app entirely unless the Trump Administration approves a deal that would distance TikTok from its Chinese parent.”
A Christmas Tale of Two Cities: “This Christmas will be one of exorbitant spending and lavish gifts for many American families. It’ll also be one of tight budgets and difficulty putting food on the table for many others…High-paid U.S. workers are benefiting from a strong stock market and lower expenses, allowing them to save more money than ever — and spend more on holiday gifts. The less fortunate, meanwhile, are grappling with job losses, eviction and food insecurity. Known as the ‘K-shaped’ recovery, the disparities will be on full display this holiday season.”
The 30: “The ruling after a California federal court hearing Monday might serve as an early test of ‘Fortnite’ maker Epic Games’ claims that Apple’s App Store practices run afoul of antitrust law, legal analysts say. Epic sued Apple and Google last month after they yanked its shooter-survival game from the App Store and Google Play…The lawsuits are significant because Apple and Google operate the world’s two largest app stores, which are critical gateways for how consumers access everything from entertainment to education and help drive billions of dollars in annual economic activity.”
London Calling: “Uber is allowed to operate once again in London, once its most lucrative city, after winning an appeal over the revocation of its license.”
Don’t Bite The Hand: With companies like Spotify and Epic Games rallying against app marketplace dominance, Google is “expected to reinforce its in-app purchase policy with developers.”
Major League SPACs: Sportico published a “rundown of the SPACs that have filed to go public this quarter, limited to those with an interest in sports, a related field or have involvement of notable sports business figures.”
We Built Chip City: “Kioxia Holdings, the world’s second-biggest maker of memory chips partially owned by Japan’s Toshiba, said it will postpone its initial public offering that was expected to raise as much as $3.2 billion.”
Tata For Now: “India’s Tata Group is in talks with potential investors about taking stakes in a new digital platform, seeking to modernize its consumer businesses as retail giants like Amazon and billionaire Mukesh Ambani pile into the country’s fledgling e-commerce market.”
Series A-PI: “This morning, Noyo, a startup that provides APIs that link players in the health insurance space, announced that it has closed a $12.5 million Series A round of funding.”