Bouncing Back

Impossible expectations yield to rational reviews

Bouncing Back

Investor sentiment often runs a stock too far in one direction and then bounces back too far in the opposite direction.

It can be fairly asked if that has happened on the recent recoveries in the price of the stocks of Macau casino operators.

Use Las Vegas Sands and Wynn Resorts as examples.

When Macau was booming, investors drove LVS and WYNN up to unsustainable prices in the apparent belief that Macau would grow 40 percent a year until every last Chinese player spent his life savings at the baccarat table.

The unmistakable sign of a top came when one analyst added onto stock price targets the value of Japanese casino licenses.

At the time, I noted that Japan hadn’t legalized casinos yet, very possibly would not, and even if it did, there was no assurance that LVS or WYNN would win the licenses or that the rules and taxes would entice them to seek licenses.

Of course, here it is two years later, and Japan still hasn’t authorized casinos.

What did change was Macau. The central Chinese government’s anti-corruption campaign became pervasive and relentless, and there might have been a little “we’ll show ‘em” motivation on the part of the mainland’s Communist masters for the American and Hong Kong billionaires getting richer off its citizens.

The result was a long, unbroken, demoralizing decline in gaming revenues that set off a bear market in Macau gaming stocks.

From an extreme high of $88.28 for LVS and $249.31 for WYNN in March 2014, their stocks plunged to $34.88 and $49.95 by this January. That was a collapse of 60 percent for LVS and 80 percent for WYNN.

This created a huge buying opportunity. Las Vegas Sands’ dividend alone yielded 8 percent and appeared safe. But sentiment remained poisonous.

Then, Macau gaming revenues flattened out. They rose modestly over the preceding months from December through February and a rebound in the stocks began, gained momentum and became a rocket ride.

By early March, LVS rebounded 45 percent to cross $50 and WYNN 70 percent to soar past $85.

The stock recovery happened a lot faster than the gaming revenue recovery that sparked it. In fact, revenues didn’t grow at all on a year-over-year comparison.

But this is investor sentiment we’re talking about, not cold, calculated reason.

For the record, we are investors in both WYNN and LVS and believers in both companies long-term, for reasons we’ll explain in a future column.

A Rose By Any Other Name

The blossoming of daily fantasy sports is starting to look more like a daylily than a rose.

Or, in the famed but more prosaic words of Andy Warhol, DFS might already have had its 15 minutes of fame.

Until recently, DFS was the rage. Conference seminars on DFS were standing room only. Every day a major league sports team, or entire leagues, were signing deals. Giant media companies like 21st Century Fox, Google, Disney and Warner Brothers were showering DraftKings and FanDuel with investment money.

And you couldn’t watch a sports event on TV without being barraged with DFS advertisements trying to part you from your money with the promise of big wins that sounded oh so much like gambling, not some cerebral game of skill.

Now, there are deep cracks in the edifice that threaten its collapse.

It started when the over-the-top advertising prompted anti-gamblers, legislators and attorneys general to question whether DFS is really gambling, thus illegal almost everywhere. That got a big boost from Nevada regulators who said DFS operators have to be licensed as gambling operations.

Since then, the reaction to DFS has become almost as loud and frequent as the industry’s autumn advertising campaigns with attorneys general in big states like New York and Illinois classifying it as gambling and legislators in at least 22 states introducing bills to ban or legalize the activity.

The result is an impaired business, and the result of that might be the drying up of investment needed to keep a still money-losing infant industry alive.

The first clear break occurred some weeks ago when 21st Century Fox revealed that it had written down its $160 million investment in DraftKings to $65 million.

For a company whose earlier investments loosely valued it at $1 billion, that would calculate to a value of just $400 million.

Adam Krejcik and Chris Grove provided some interesting statistics on the vulnerabilities of DFS in a report published by Eilers & Krejcik Gaming.

DraftKings was $280 million EBITDA-negative last year and chief rival FanDuel minus $137 million, they estimated.

Further, the great expense of player acquisition, including that TV ad bombardment, means DraftKings spent $174 to acquire a player and FanDuel spent $123.

That means it will take them 15 to 24 months to break even on an acquired player, Krejcik and Grove calculated.

Further, value is highly concentrated in a very small number of players. Just 1 percent of players provide 60 percent of revenues, they estimated.

And even though Krejcik and Grove expect DraftKings and FanDuel to focus on bringing down costs this year, an observer has to wonder about the viability of the business model.

Indeed, DraftKings has all but admitted as much with its attorney telling the Boston Globe that the company could go out of business if it loses its lawsuit in New York and can’t serve customers there.

One expects that in this environment it will be difficult, if not impossible, to raise fresh money to replace the dollars bleeding away.

A final nail could be driven by the 3rd Circuit Court of Appeals.

If the federal judges clear the way for sports betting in New Jersey, and other states follow, fantasy sports could revert to its original niche of hard-core sports fans acting like sports fans, while gamblers move over to the main attraction—betting on games.

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