I feel a little like Barry Manilow.
In listening to the repetitive, pounding rhythms of rap—or opposite that, the monotonous droning of songs that all sound the same—Barry Manilow asks, “What ever happened to melody?”
Likewise, in this year of stay-at-home stocks, euphoria over sports betting, proliferating SPACs and Robin Hood investors (sic), I’m left to ask: “Whatever happened to fundamentals?”
Maybe, like Manilow, I’m just a relic of a bygone age. But I don’t think so. Just as there is eternal beauty in the songs that populate the Great American Songbook, there is timeless value in companies that consistently provide returns to shareholders.
We’re all pretty much suckers for a good story, and 2020 has delivered plenty of them. But if we’re going to progress as investors, as an economy, as a society, we need real value.
Companies like Zoom and Peloton certainly provide valuable services. The big question for them may not be whether they provide value, but whether their stocks have raced too far ahead.
There are many other high-flying stocks that seem likely to fade away when the real need to generate profits becomes unavoidable. Not all stocks can just trade at 30 times future sales on the promise of profits in three or four years.
Deutsche Bank gaming analyst Carlo Santarelli just published his 2021 outlook, in which he points out that fundamentals and valuation still matter.
Santarelli points to the irony of gaming REITs, which provide solid earnings and high dividends, have survived and remained intact through the severest testing of their business models by Covid-19, yet see their stocks languishing in this bizarre bull market.
Similarly, he points to Wynn Resorts, Las Vegas Sands and IGT, which possess fundamental strengths that, in normal times, investors would treat like the blue-chip companies that they are.
Some observers compare 2020 to 1999, and warn that the bubble will burst now as it did then. But this isn’t 1999. Back then, companies with no profits and barely any revenues were selling at sky-high prices. The mantra was, “Don’t worry, we’re building customer bases, profits will come.”
Their bubbles burst.
In his analysis, Santarelli forecasts sports betting revenues to reach $10.4 billion by 2027. That’s half the size of many estimates. He bases his forecasts on the actual experience in New Jersey, America’s most mature online sports betting and iGaming market, and on realistic chances that more states will legalize sports betting.
Santarelli also points out faulty comparisons to the mature markets in the U.K. and Europe, and notes that their tallying of market size includes horse racing, which American forecasts do not. Thus, using the size of their sports betting markets to calculate America’s is simply wrong.
Put another way, there may be a lot of superficial analysis and wishful thinking out there when it comes to sports betting.
That doesn’t mean sports betting won’t be a big benefit to many companies, especially those that focus on being profitable, such as Rush Street Interactive and Golden Nugget Online, which are about to go public through SPACs.
Those companies are underpinned by sound fundamentals. And that is music to the ears.
