It seems fair to say at this point that the upcoming election is a bit divisive. When looking at stocks, it’s helpful to put political persuasions aside and seek out companies that won’t get drawn up in the volatility and debate.
Keep an eye on sports betting
It’s not going away. Neither party has done much of anything to impede the spread of states legalizing sports betting. DraftKings (NASDAQ:DKNG) and Penn National Gaming (NASDAQ:PENN) offer compelling access to an industry that is in the very early stages of realizing its full revenue potential. With professional golf’s Masters Tournament set to be held in November, an NFL season that seems likely to carry all the way through, and the pending return of more college football teams in October, there are some big betting opportunities that will roll through the fall and into winter. It’s a market that can avoid the political turmoil of the election. Overall, I prefer DraftKings for the advantage it has in terms of an already established user base. Penn National, with its investment in Barstool Sports, is working to build out the launch of its sportsbook.
The cautionary tale at this moment is valuation. DraftKings had an epic run of nearly 500% this year, with no earnings to speak of. The fantasy sports/betting firm is down $230 million in the first six months of this year. With the announcement that the company was issuing another 32 million shares, the stock is down from its all-time highs. I exited my DraftKings stake this week on the news, and think the correction will continue, with the potential for a new opportunity in November. The basis for the pullback to continue is the disconnect between revenue and pricing, along with the increasing prevalence of COVID-19 cases, and cancellation of games within the NFL. The season won’t be cancelled, but it’s enough of a headache to give the market a pause.
In contrast, the company raised $800 million in the second quarter, bringing its cash position to a solid $1.2 billion. That should provide more than enough liquidity for the company to push its progress in the betting industry. This one will be all about revenue growth and the continuation of sports. The big momentum points will be based around expansion in further states, and the revenue that is created throughout the rest of 2020 and into next year. Pro forma, or core, revenue for the first six months of the year ended June 30 was $188.4 million. Full-year 2020 guidance provided in the second-quarter results gave forecasted pro forma revenue of $500 million to $540 million. That is an annualized growth ranging 22% to 37%.
With states like Virginia and Michigan, having passed legislation, opening up gambling, the opportunity-set is increasing for this business.
Tech has infiltrated our lives (and I’m not entirely convinced it’s a good thing). No candidate or congressional group can change that. Overall, I say, keep it simple. Microsoft (NASDAQ:MSFT) is the way to go. It might sound more exciting to chase something like Zoom Video Communications, but a stock that has run up over 200% in the last six months, principally on the sales benefits of a socially distanced office environment, might not be the best long-term move.
On the other hand, Microsoft’s services are largely essential to businesses. Having Excel is a nonstarter. It’s very hard to get by in an office without it. Cloud services are equally important these days, and Microsoft reported that revenue from its Intelligent Cloud segment was up 17% in the fiscal fourth quarter ended July 22. Total revenues increased 13%, to $38 billion. These areas are not topics of political tension at all.
At the end of June, Microsoft carried over $136 billion in cash and short-term investments. The software company puts together annual sales growth rates in the double digits, and finished the fiscal year with $44.3 billion in net income. Outside of the fact that the company essentially has involvement in every area of the industry, I like Microsoft because it has the tech know-how and the capital at hand to make investments in the right places.
Avoid the chaos
I reiterate my general thesis for November that it’s best to seek investments that avoid the politics of the election altogether. While the valuations surrounding the sports betting industry require navigation, this is a promising growth industry that can yield big results for those that play it right. DraftKings is forming an opportunity in its pullback. Tech, the biggest industry on the planet at this point, is a must for any portfolio. Why not go for Microsoft; a company that is capitalizing on cloud, while holding its place as a must for office based software?