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Daily Intelligence Briefing

Tuesday, June 30, 2020

Identifying Change-Driven Investment Themes – Five sections, explained here.

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I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Gamblers Flooded Brokerages amid COVID Lockdown, Just in Time for a Brand New Sports Betting ETF

Summary: Beginning in March, many wondered how the rapidly growing online sports betting space would sustain itself in the aftermath of nearly all major sports organizations closing down operations indefinitely. Interestingly, what is being hailed as the “Day Trading Revolution” supplanted sports betting over the last 2 months for many. But the time has almost arrived for those deprived bettors, who have certainly driven a huge uptick in brokerage accounts, to return in droves to their natural habitat. However, some of their incoming payoffs could land in a brand new ETF focused on online sports gambling.

Related ETF: Roundhill Sports Betting & iGaming ETF (BETZ)

Many wondered how sports betting would survive the shutdown of almost all major sports that begun back in March. The cancellation of NCAA basketball’s March Madness tournament alone meant that the up to $10 billion wagered each year during tournament time was completely wiped out. Last year, Nevada sportsbooks posted a record March handle of almost $600 million. The suspension of imminent playoffs in the NBA and NHL, as well as opening day in the MLB has intensified acute losses.

Alas, all is not lost for the gambling industry in 2020, as the light at the end of the tunnel is finally beginning to glisten through.

Much like cannabis legalization/decriminalization, which MRP covered last week, sports betting is an industry that could see huge upside in the 2020 election season, especially now that many states could pull in much needed tax revenue from legal validation. Morgan Stanley predicts the US market will generate almost $7 billion in revenue by 2025, up from $833 million this year. That estimate is an increase from an expected $5 billion the company had issued in early 2019. According to Investment U, nearly $22 billion has been wagered legally here in the US since 2018, generating more than $1 billion in tax revenue for states.

In the intermediate, the most intriguing effect of slowing sports betting was the rise of what many are calling the “Day-Trading Revolution” – led by Barstool Sports Founder and self-styled “Presidente” Dave Portnoy.

Though some betting action persevered through the worst of the virus outside of the US, mostly focusing on obscure subjects like South Korean baseball, Russian Table Tennis, and video game football simulations, the biggest beneficiary of the gambler’s scramble to wager was actually the stock market.

The aforementioned Portnoy, mostly known for going all-in on sports betting, pivoted to livestreaming his highly speculative stock market bets, titling the exceedingly popular streams “Davey Day Trader Global”, and leveraging his 1.6 million follower base on Twitter. Amid the huge rally in equities that followed the COVID-induced S&P 500 sell-off of more than 30% in March, hyper-cheap stocks were an absolute feeding frenzy for new investors that swarmed no-fee brokerage Robinhood, a popular service among Millennials and Gen-Z retail investors with small to moderate amounts of capital. The growing fintech titan saw daily trades up 300% in March year-over-year. Robinhood also told CNBC “over half” of its customers are first time investors.

Net Interest’s Marc Rubenstein writes that “43% of North American men aged 25-34 who watch sports also bet on sports at least once per week, and that’s the same group that has flocked to Robinhood”.

Robinhood added more than three million funded accounts in the first four months of 2020, and half of customers who opened accounts this year said they were first-time investors, according to Nora Chan, a spokeswoman for the Menlo Park, California-based firm. Per Bloomberg, E*Trade Financial Corp. (Portnoy’s broker of choice) had 329,000 net new accounts in the first three months of the year, with 260,000 added in March alone, the firm said in its first-quarter earnings statement. That was more than the company’s previous best annual net record.

“I’m enjoying the stock stuff … It’s been fun,” Portnoy said in a “Mad Money” interview, “but I’m a sports guy. I’m a sports bettor. I want sports back, and when it comes back that’s going to be where my focus is.”

While that return is coming up fast, the loss of Davey Day Trader Global is unlikely to hurt valuations in the casinos and gaming sector, particularly betting operations focused on online gambling.

If all goes as planned, the resumption of sporting events should be a whirlwind for sports betting as the MLB will restart operations on July 23rd, just a week prior to when the NBA playoffs should tip off on July 31. The NHL is also targeting their playoff series to begin within that same time frame.

Not only is Barstool Sports a go-to platform for sports and betting insight, it’s got a vested interest in the continued development of gaming markets. Penn National Gaming, Barstool’s parent company, which closed its casino doors as the U.S. was put on lockdown to stop the spread of the coronavirus, has now reopened a majority of its locations, like most casinos. About 50% of Penn’s slot machines and table games are also open for service, but restaurant capacities remain limited.

Even when sports do return over the summer, these casinos will undoubtedly be hampered by residual restrictions, as well as stigma around enclosed, packed buildings with COVID-19 still lingering. Electronic, app based gaming, therefore, will find itself in a more powerful position than ever before.

Therefore, Penn’s bigger bet for this year will be launching an online Barstool sportsbook this year as an additive to their casino operations. Their much-anticipated sports betting app in time for the 2020 NFL season in September, CEO Erika Nardini recently told FOX Business.

As Seeking Alpha wrote last week, the BetMGM sports app from MGM Resorts generated a 5,441% YoY increase in the number of bets placed on last weekend’s RBC Heritage golf tournament and a 3,982% YoY increase in handle, per ESPN’s David Paydum. The explosion of bets on a second-tier golf tournament is a palpable indication of sizable pent-up demand awaiting the return of sports betting’s usual offerings.

As of now, a total of seven states – Nevada, New Jersey, Pennsylvania, Rhode Island, West Virginia, Indiana and Iowa – have legal online sports betting. DraftKings projects that the online sports betting market may reach $18 billion annually in revenues based on the assumption that states with 65% of the US population legalize it.

Morgan Stanley analyst Thomas Allen recently noted that, in New Jersey (the most developed state market that permits online casino games like blackjack and roulette, in addition to sports betting), has seen revenues running at a $1 billion annual rate, above his 2020 estimate of $813 million. Last year’s online gambling revenue in the state totaled $483 million.

New Jersey’s handle, or overall money wagered, dropped 65% to $181.9 million in March, the month in which sports leagues were forced to suspend play. The negative trend continued in April, when the handle fell 82% YoY to $54.6 million with nearly all sporting events on hold.

However, Fox Business notes that the market showed signs of recovery in May, when the UFC, NASCAR, golf and other sports returned to play with strict safety measures in place. New Jersey’s betting last month was $117.8 million, which is a decline compared to the previous year, but a significant improvement.

Earlier this month, the UK’s William Hill raised around $276 million (£224 million) to strengthen its balance sheet and capitalize on the fast-growing US sports betting market. Barron’s writes that The pandemic will accelerate the shift toward online betting, a trend which William Hill and European competitors GVC and Flutter Entertainment have all been adapting to. All three have also set their sights on America, which William Hill estimates will have a market size of $7.5 billion by 2025. The race to be the top dog in the US has become tougher as a result of the pandemic, but the trio looks set to benefit in the long term.

Perhaps the most interesting aspect of this story for investors is the recent launch of the Roundhill Sports Betting & iGaming ETF (BETZ), the first exchange fund dedicated to the fast-growing sports wagering and internet casino markets. Launched on June 4, the newly minted fund follows the Roundhill Sports Betting & iGaming Index. According to Roundhill, that benchmark features:

“Companies who are actively involved in the sports betting & iGaming industry. This classification includes (i) companies that operate in-person and/or online sports books (ii) companies that operate online/internet gambling platforms and (iii) companies that provide infrastructure or technology to such companies in (i) or (ii).”

Online Sports Betting Charts

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