2018 saw the creation of a new, exciting and very profitable industry in the US. The 2018 amendment of the Professional and Amateur Sports Protection Act of 1992 legalised sports betting. The law ‘cut the red ribbon’ so to speak and allowed investors to enter the million-dollar industry that is online sports betting. Each state can distribute licenses and collect taxpayer’s money.
Every time a new industry is formed market leaders (incumbents) look to gain a foothold early on. Discovering market leaders early on is the type of information that can you make you wealthy. Just look at Afterpay (ASX: APT) in the BNPL industry, Amazon (NASDAQ: AMZN) with online shopping, and Telsa (NASDAQ: TLS) with Electric Vehicles.
Today we will discuss Points Bet Holdings (ASX: PBH), a betting company who appears to be at the forefront of this emerging US industry.
Why is PBH up 12% in 2020?
PBH’s 2019 story was breathtaking. The tech stock listed at an IPO of $2 back in June 2019 and climbed to $4.79 on December 31st. PBH’s 140% surge represented Points Bet acquiring licenses for Iowa, Illinois, Indiana, West Virginia and having state access to Colorado, Louisiana, New Jersey, Missouri, Ohio and New York. There seems to be a positive correlation between the share price and PBH receiving licenses. Meaning every time PBH acquire a license their share price surges.
The momentum behind 2019 appears to be operating at full speed as PBH rise 12% in the first two months of 2020.
Price Sensitive event (PSE) one: Online sportsbook and gaming access to Michigan – 6th January 2020
The Michigan government gave PBH the green light to enter the market. The government’s approval allows Points Bet to offer online and mobile sports wagering in Michigan. In turn, investors translated license approval as more revenue for PBH in the future. Thus, bullish investors rallied behind PBH, driving stock growth in early 2020.
PSE two: PointsBet Secures Kansas Market Access – 31st January 2020
PBH announced their entrance into the Kansas betting market via an agreement with the Kansas Crossing Casino. The partnership allows PonitsBet to provide retail and online sports wagering across the state of Kansas. Again, the positive relationship between licenses and share price revealed itself as PBH reached a record high.
Why is PBH down 7.5% this week?
It might be difficult to wrap your head around why PBH is down this week. Especially, with the bullish 2020 news and impressive 2019 progress. PBH dipped this week due to short term investors cashing in.
It is important to understand that investors joined the PBH story at different stages. Short terms investors who were the first to jump on the PBH train back in June, decided to sell after the Kansas announcement. Ultimately, resulting in the decline in the stock. Thus, the fall is not concerning just ordinary share price activity.
PointsBet reported net cash of $14.3 million for Q2 of 2020. In turn, PBH can use the cash to fund the establishment of PointsBet centres across US states. Thus, increasing revenue.
PBH heavily invested their funds into advertising and marketing. Because Pointsbet needs to cement a brand reputation across the states in order to attract more customers and gain a market foothold.
In turn, PBH is still not profitable. PBH reported $2.1 million less than expected on advertising and marketing in Q2 2020. Showing signs that the advertising is paying off and cash can be allocated elsewhere.
Is PBH worth the investment?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
What might appear as a fairy tale story coming to true to some might appear as a risk to others ?
On one hand, PBH is the first mover in the US sports betting industry. Pointsbet knows how to move a market. PBH’s foothold in 11 states speaks volumes as bullish investors drive up the stock price. Imagine what PBH’s stock would be valued if they had all 50 states?
I personally am taking a calculated risk on PBH. Because their story so far demonstrates to me that they know how the US market works but more importantly how to dominate it. Thus, I am happy to put up with unprofitability if PBH continues to secure more licenses.
However, for others, PBH is an unprofitable company who’s share price is rising on the expectation they become the US market leader. That’s perfectly okay because every investor is different.
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The information above should not be taken as financial advice.
Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG.