QUANDARY: Bull and Bear, I’ve called you in today because once again, I don’t know what to do. Inflation is here for sure, but the Fed says don’t worry, it’s transitory. We have high unemployment, but businesses can’t find workers. Stock prices have come down and look appealing, but Bear, you’re not convinced.
BEAR: Oh, I’m convinced, all right. I’m convinced this is the start of a very bad stretch. And this time, Robinhood is going to get tossed in the Sheriff of Nottingham’s slammer.
BULL: Wait a minute, Bear. Before you condemn us all to perdition, let me point out some facts.
First, the economy is growing faster than 6 percent a year. Second, gaming companies, especially casinos, have become dramatically more efficient and now make more money on less revenues and profitability, after all, is what it’s all about. Then there’s Covid…
BEAR: I don’t mean to interrupt, but come on, Pollyanna. The economy is rising fast because it’s coming up off the canvas and because the government is spending money like water. It’s feeding inflation, which, if you remember, is ruinous for nearly everyone.
BULL: Thanks for the interruption. Now let me get back to the facts. Covid has not just forced companies to operate more efficiently. It’s accelerated efficiency, as we now do more things online, including entertain ourselves. It’s no coincidence that state after state is legalizing online sports betting, gaming and lottery, creating huge new revenue streams for gamers.
BEAR: Yeah, and stocks are worth 30 times future revenues and 70 times future EBITDA—if they ever generate any EBITDA.
BULL: Come on, Bear. You know stock prices have come down. DraftKings and Penn National are down over 40 percent.
BEAR: But no operator in U.S. online gaming is making money. You know what you call that valuation—infinity. Come the next recession and the down stock market we’re already into, profitability will be more than a wishful dream for some far-off future day. It’ll be a matter of survival.
BULL: You know the reason companies are losing money. They’re establishing market share for the day when online grows to $40 billion a year in revenue and they achieve margins of 25, 30 and 35 percent. Then the stocks will be worth every penny of today’s valuations.
BEAR: Sorry, you can’t bank market share. And by the way, Bull, have you looked at all those crazy EBITDA projections? They’re all based on achieving double-digit market share. But guess what? Not everybody can have 20 percent share. And the big boys are moving in now, like Wynn and Caesars. Not every stock’s story will end well.
BULL: Yes, not every competitor will survive. But you’ve got niche players that many investors are overlooking. Like Rush Street Interactive—focused on profitability and more profitable online casino. And Score Media and Gaming, the hometown company in Canada, which should be an immediate market-share leader when our neighbors to the north jump in.
And of course, you can always buy stocks of those selling software to the operators, like Kambi and GAN, or services to all stakeholders, like Genius Sports.
QUANDARY: Guys, you’re getting way too granular for me. Let’s get back to what an investor should do in this environment. Are there safe havens?
BEAR: Not in stocks. Buy copper.
BULL: Buy stocks. We’re entering what Caesars CEO Tom Reeg says will be the biggest consumer entertainment boom of our lifetimes, and Reeg doesn’t blow smoke.
BEAR: But for your scenario to succeed, we also need Fed Chair Transitory’s—er, I mean Powell’s—rosy outlook on inflation to prove out.
BULL: It will. What we’re seeing today isn’t underlying inflation. It amounts to temporary effects of all the disruptions the economy suffered because of shutdowns. Bear, I’ll bet you a bucket of honey against a bale of hay that a year from now your worries will be history.
BEAR: You’re on. Can you throw in a few bees for protein?
QUANDARY: Very funny, Bear, and thanks for the debate, guys. But I’m still in a quandary.
