At time of writing, the share price of PointsBet Holdings Ltd [ASX:PBH] is up a significant 29.03%, trading at $1.60.
For some context, let’s go inside what’s happening in the AFL.
Last night Australia witnessed one of the strangest and eeriest sporting spectacles to ever happen.
At 7:30pm last night I settled into my couch to watch two of the AFL’s biggest rivals battle it out at an almost empty MCG.
What turned out to be an exciting match, was soured by the silence that came between the commentary and the yells of the players on the field — there was no crowd to give the game the soul and intensity it usually has.
I am a numbers man.
I’ll often check different bookmakers, as I’m curious to know what kind of odds they’re placing on matches and the factors that might influence those odds.
Which got me thinking, how are other punters feeling about the state of sport right now?
And more importantly, how are investors reacting to the suspension of sports worldwide?
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No sport, no profit — meaning PointsBet’s share price could suffer more
The answer to the last question is rather obvious, not good.
The spread of the coronavirus has meant that sporting leagues across the globe have been suspended or forced to play behind closed doors.
For PointsBet that’s meant fewer opportunities to offer wagers to punters and ultimately, little opportunity to make a profit.
From June 2019 to the middle of February 2020, the PBH share price had made a return of ~184%. The strongest performer by far among similar companies in the casino and gaming sector.
Source: Trading View
PBH (blue), Aristocrat Leisure (orange), The Star Entertainment Group (yellow), and TAB (teal) over the past year.
PBH is now down 36% over the past year as the wide world of sports continues to shut up shop.
For many in Australia — and the US too, since gambling on sports outside of casinos is being legalised across the country — having the odd punt while watching sport with your mates has become part and parcel.
However, with the recession looming, disposable income is likely to dry up.
Meaning not only are there fewer sports for PBH to offer wagering markets on, punters are likely to be spending less on gambling.
Does this make PBH share price cheap?
Before COVID-19 crippled markets and sent the economy into a tailspin, PBH had been showing some impressive growth.
Not only that, the company also has some serious potential.
With the legalisation of sporting gambling in the US, what is expected to be an $8 billion industry by 2025, PBH has been busy expanding access to its services across the country.
PBH recorded a 123% growth in active users in the 12 months ending 31 December 2019, with their American user base nearly doubling in a six-month period.
Australian revenue more than doubled to $24.8 million in H120 compared to the prior corresponding period thanks to a strong marketing spend.
But the question on everyone’s lips should be, ‘does PBH have what it takes to weather the storm?’
In a statement released 13 March, PBH announced they had AU$147.9 million of corporate cash on the balance sheet, the majority of which is held in USD.
With the company aggressively pursuing new customers, operating expenses have increased significantly year-on-year.
Although PBH can easily curb marketing costs to lower operating expenses, their burn rate is still of concern, and the weakening AUD against the USD further alleviates costs associated with their Australian–based activities.
I think the prospects PBH offers are solid, but its intrinsic value — in this type of market at least — may be lower than the current market price.
If the major Australian sporting codes go the same path as those in the US and Europe, PBH could have much further to fall.
It’s the companies with significant cash reserves that are best poised to weather the current storm.
If you’re looking for value in the current market, then you should be looking for stocks that have a war chest behind them.
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Regards,
Lachlann Tierney,
For Money Morning
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