The SportsFolio Journal - November 2020
We kind of managed to make sports work this year (some leagues ran better than others), but this COVID-19 thing doesn’t seem to be going anywhere. That is a problem for sports. The MLB debt has topped $8 billion, with Manfred mulling options for next season. The NBA came in $1.5 billion under revenue projections, and fears a billion dollars in losses if the league does not start until 2021. If fan lockouts continue, the loss could be as much as $4 billion.
Creating gambling lounges in arenas is not going to solve the problem. Even if we put the long-term costs of sports gambling aside and focus on the immediate cash problem, the gap is simply too big. We need bold solutions. We cannot just think outside the box. We need to get rid of the box.
Sports investing is not just a better way. It is likely the only way.
Investing … A word that was widely used, yet rarely understood. A positioning that most businesses aspire to, yet cannot reach on the merits. A confusion that, in our opinion, is one of the most significant reasons why our country is not realizing its true potential.
Consider Robinhood. Going after retail traders and gamifying the stock market, it has reached a truly astonishing $11.7 billion valuation in its most recent funding round. This recent Bloomberg piece has done a great job not only chronicling Robinhood’s ascent but also laying out the fundamental issues with it. Nowhere is this more evident than a David Portnoy quotation, whom the Bloomberg piece calls the most notorious retail ringleader. Calling the stock market “legalized gambling,” Portnoy states: “Just like sports betting is entertainment, I think the stock market is entertainment. I don’t think there’s anything wrong with that.”
Well, there is a lot wrong with that and Portnoy is being quite irresponsible with his rhetoric. The stock market is not legalized gambling; it serves a valid, economic purpose. It may be entertaining for some, but that is secondary. The primary purpose is threefold: it helps with capital formation, results in price discovery and gives investors a menu of assets to invest in. None of those things are true with sports betting, which only entertains. Sports betting is not, and never will be investing, but Portnoy needs to sell the parity. Thus, he reduces the stock market to entertainment.
It is not clear whether Portnoy is sincere in his beliefs or is tricking others - he did sell Barstool to Penn National Gaming, and got Penn stock in the process. Penn is among the 100 most popular stocks in Robinhood as of November 1, 2020. Thus, Portnoy clearly benefits from an environment where more people start buying stock without regard to time-tested principles of investing. Intentional or not, the effect is the same: more gamblers in the stock market, most of which will likely end up losing their hard-earned money, while Portnoy will be laughing all the way to the bank.
Robin Hood himself (the fictional folk figure after which the company is named) is a controversial character. His methods leave much to be desired (stealing from the rich), but his intentions are presumed to be good (giving to the poor). Robinhood, the company, is ultimately exploiting this theme and is trying to create an aura around equality and democratization of investing. This quote (also from the Bloomberg piece) from its COO highlights that theme: “There’s really a notion that it’s gambling or gaming if you’re new to the market, but it’s investing if you’re wealthy,” she says. Either she does not understand these terms or conflates them on purpose. It is perfectly possible that a “new” entrant is investing, and a veteran is speculating; the stock market does not know or care, who is new. Robinhood the company is, unfortunately, turning into a wealth transfer scheme from the poor to the rich (how ironic!) by selling a vision it does not understand.
Sports & Money
Well, that was quick. Last month, we opined that the stock price of DraftKings may be in irrational exuberance territory, and warned of a reckoning. When we uttered those words, the stock was $63.78. That turned out to be the top, and since then, the stock has essentially been in free fall. On Friday, it closed at $35.40 giving away all the gains in September. It is now back, almost to the penny, to exactly where it was before the Jordan deal was announced.
There wasn’t necessarily a single event that created this decline. The markets are jittery with the upcoming elections, COVID-19 is rising, and some sports leagues have had their share of COVID-19 problems. The lock-up provisions have expired, and looks like some insiders are cashing out. Certainly, the trading volume has been substantial. In August, there were two days where volume was above 20 million a day. In October, there was only one day when the volume was below 20 million. This is hard to justify even as the awareness around the stock may have increased a bit. By the way, DraftKings, just like Penn National Gaming, was among the 100 most popular stocks in Robinhood as of November 1, 2020.
Let’s take a step back. What is really happening here? To us, this really sounds more like a wealth transfer from the irrationally exuberant Robinhood crowd to company insiders. How?
1) Brand yourself as a game when you are not;
2) Ride daily fantasy sports as a trojan horse into the sports betting universe;
3) Since sports gambling cannot be elevated to investing, bring investing down to the level of sports gambling creating a false parity;
4) Double dip as more people gamble and more people buy your stock thinking they are “investing”;
5) Cash out when you can.
This is quite the recipe. To break out of this, we believe true financial education (we are working on it folks) will be key. Eventually, we also trust that regulators, agencies and the courts will see right through this scheme as various aspects are litigated. On that note, the IRS doubled down on its position that daily fantasy sports is wagering. The IRS memo is here (PDF). It was, coincidentally (if you believe in coincidences that is), dated September 14, 2020, the same day DraftKings announced the ESPN deal. It was released about a month later on October 16, 2020. The release of the memo did not do much to the stock price, but it may just have been the single most important thing that happened to DraftKings, and more broadly the industry, this month. Why? It signals IRS’s commitment to the position, which in our opinion is a sound one. Is this just a nuisance for DraftKings or a fundamental issue to deal with? We shall see.