The SportsFolio Journal - May 28, 2021

Charlie vs. James: An NFT Update

This was arguably one of the internet's finest moments. Charlie, a super cute baby, bit his older brother’s finger, who complained in a lovely British accent. That was 2007. 

It may not be the most-watched video on YouTube, but it is closing in on one billion views. It has been a solid revenue source for the family; about four years in, it was reported that the video led to a little over $150,000 in ad revenues. Ok, perhaps not a life-changing amount, but hey, it is the moment that is priceless. Any revenue on top of that is just icing on the cake. 

We heard recently that the video may not be up for much longer. What are you talking about, you might say, why would anybody take this global treasure down?

The answer is because it is a no-fun-to..., sorry, non-fungible-token, or NFT. Until very recently, it was believed that Charlie would leave the internet forever because the video was converted into an NFT which sold for $761,000 and it was reported that the video would be removed. While there are some thorny issues around what rights one has when something is converted into an NFT, it is generally understood the copyright belongs to the original content creator and not the NFT owner, so it was not clear whether this had become a rights issue. 

All Charlie fans rejoice! Word just got out that the buyer decided not to remove the video, so that’s a relief. Charlie’s father said:

The buyer felt that the video is an important part of popular culture and shouldn’t be taken down. It will now live on YouTube for the masses to continue enjoying as well as memorialized as an NFT on the blockchain.

Give it up for Charlie!

To be clear, NFTs themselves are not a bad thing. In fact, converting the “Charlie” video into an NFT  is probably a good use of the technology. What is problematic is the desire to redress fundamental truths about finance and investing under the guise of innovation. Consider this chart:

After briefly hitting the $1 billion mark on May 3, 2021, the market cap of the “Moments,” those NBA highlights that you can now buy as an NFT, is down to $635 million, a whopping 36% drop. Meanwhile, Bitcoin is down almost 35% during the same period. 

Coincidence? Maybe not. Notwithstanding the fact that you can find yourself on to access historical daily Bitcoin prices, one cannot invest in Bitcoin, since it is not a financial asset. It is a speculative tool driven by “animal spirits,” a phrase coined by the great John Maynard Keynes. Here is the original excerpt:

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

It came from Keynes’s seminal book: The General Theory of Employment, Interest, and Money

If cash flows are not driving prices, but rather animal spirits, it may not be that surprising that two seemingly unrelated pseudo-assets would follow a similar trajectory. 

The “Charlie” NFT sold for over three-quarters of a million dollars. A top James Harden moment is going for almost $30,000. As designed, most NFTs are collectibles, not assets. In that regard, the Charlie NFT may not be a bad move. We are not so sure about the James NFT. If you are looking for a good move there, consider seeking it the old-fashioned way, and marvel at his mind-blowing crossovers. They also happen to be free. 

Wrong Address?

Sports betting was supposed to be the greatest thing since sliced bread. A pot of gold was waiting for us at the end of the rainbow. Jobs were going to be created, governments were going to collect tax revenues, etc., etc. Even with a lot of legal uncertainty, the backlash in the U.K. and a super competitive offshore system, expectations were high.

If a pro-gambling platform starts questioning whether that is real, you know that it is not. 

The issue is that the total addressable market is likely overestimated and to a significant degree. 

Here is the definition of the total addressable market, or TAM, by CFI (Corporate Finance Institute):

The Total Addressable Market (TAM), also referred to as total available market, is the overall revenue opportunity that is available to a product or service if 100% market share was achieved. It helps determine the level of effort and funding that a person or company should put into a new business line.

The nice thing about TAM is that it can be flexed to fit the desired narrative. For example, is Airbnb in the hotel business? That’s a $600 billion market. Or is Airbnb in the short-term stay, long-term stay and experiences market? That’s a $3.4 trillion market. Here is how Airbnb described their market opportunity:

We have a substantial market opportunity in the growing travel market and experience economy. We estimate our serviceable addressable market (“SAM”) today to be $1.5 trillion, including $1.2 trillion for short-term stays and $239 billion for experiences. We estimate our total addressable market (“TAM”) to be $3.4 trillion, including $1.8 trillion for short-term stays, $210 billion for long-term stays, and $1.4 trillion for experiences.

Naturally, it is easier to capture 5% of a market rather than 50%, so if you have a certain valuation in mind, you can simply increase TAM and decrease market share, and voila! You have your valuation. 

So, when DraftKings and BetMGM estimate the TAM to be $22 billion or $14 billion (pdf), respectively, it is important to stress test narratives because one narrative could lead to DraftKings being $72/share, which it almost hit on March 19, 2021. Another narrative could mean DraftKings should be more like $47/share, which is where it was earlier this week. The difference between the two is about 35 percent. Do you see a theme here?

Alternatively, maybe none of this really matters, because people will eventually choose sports investing over sports betting, anyway.