August Rally Lifts Betting Stocks, But Dangers Linger

Much of August was a long-awaited rally for growth stocks of all stripes. Stock market participants began to hope the end of the Federal Reserve Bank’s efforts to curtail inflation was in sight, given that rising interest rates slash the premium equity investors are willing to pay for shares.

Venture capitalists with a focus on sports betting are reemerging to tout their strategy, too, after lying low in recent months; private investments also suffered paper losses in tandem with the bear market. “Investors are looking to this period with excitement and optimism as they see massive opportunity for early-stage ventures,” one public relations representative for a large, sports-focused fund said in an email to JWS last week.

Waterhouse says the stock rally hasn’t erased the big concern investors have had around sports betting ventures: valuations. “Whilst many high-growth public equities are down over 80%, on a whole, high PE ratio companies trade at a 45% premium to their 20-year average. In contrast, low PE companies trade at a 15% discount to their long-term average,” he wrote.

Indeed, concerns are returning that sports betting companies will be forced to spend more to acquire customers again—after spending much of the year telling Wall Street they were pulling back in that area. Super Group (SGHC), the parent of global brand Betway, lost 3% in the month and was downgraded by Oppenheimer mid-month to "market perform" as the company’s second-quarter Canada revenue fell 18%. “We believe SGHC is becoming profitable quicker than its competitors on the company's ability to deploy its digital sports betting…” Kelly wrote, but its “largest fundamental risk is sustaining profitable revenue in Canada as the country shifts to a fully regulated market with well capitalized competitors.”

Such concerns, coupled with the Fed’s renewed statements that it intends to do whatever it takes to fight inflation, means August’s rally could lead to a September slump for sports stocks. Said investor Waterhouse: “We are positioned defensively.”