Should You Bet on Online Gambling Stocks Now?
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Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. An off-the-field sports rivalry is brewing ahead of game day. What FanDuel’s parent’s latest play means for the online gambling industry. Plus, Meta unveils its first dividend. Find out if the tech company’s stock falls into the cheap or expensive category. And, want to stop making the same investing mistakes? I’ll talk with author and Morningstar contributor Larry Swedroe about changes you can make today. This is Investing Insights.
Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.
Strong ad growth boosted Meta’s Q4 earnings. But the bigger surprise was the Facebook parent’s announcement of its first dividend. The tech company’s results showed strong network effects since more people joined its platforms and lifted engagement. That allowed it to sell more ads at higher prices. Morningstar thinks advertising growth will benefit from political-ad spending this year. However, a slowdown is likely in the next few years since mobile expansion and other categories will carry less weight. Meanwhile, Meta and its peers are facing pressure from U.S. and international regulators about data access and usage and content censorship. This could affect people using Meta’s apps and advertising demand. The company’s fourth-quarter revenue jumped 25% from last year, totaling $40 billion. Ad revenue, Reality Labs, and holiday sales mostly drove the increase. Morningstar is raising its estimate for what Meta’s stock is worth to $400 from $322. However, shares look overvalued.
Boeing is pausing its 737 MAX expansion to focus on safety and quality control. The airline manufacturer will remain at a standstill until the Federal Aviation Administration approves of its manufacturing processes. Boeing will also wait for the FAA to certify its 737 MAX 7 and MAX 10 models. CEO Dave Calhoun says the pause will benefit Boeing’s manufacturing and supply chain. Suppliers will have time to build up their stock, and employees can reexamine the assembly process. The phase could last until mid-2025. Morningstar thinks Boeing’s year-end results appear to show it’s turning a corner despite the door incident last month. Final 737 and 787 jet deliveries met expectations in 2023. And sales and operating profit surpassed predictions. Morningstar thinks Boeing stock is worth $219, down from $232, and fairly valued.
Novo Nordisk’s sales beat Morningstar’s expectations, while operating income fell right in line with them. The Danish pharmaceutical company’s diabetes drugs, like Ozempic, are driving these booming sales. Obesity drug Wegovy fell just below investors’ sky-high expectations. Morningstar believes Novo will be able to grow the top line by more than 20% in each of the next three years. Novo is working to meet high demand as it deals with new competition from Eli Lilly. Morningstar thinks the global GLP-1 market will reach $170 billion by 2031. Novo and Lilly are expected to evenly split it. Recent data suggests that there will be uses for diabetes drugs beyond their current label. This expansion will add to Novo’s value. Morningstar estimates Novo Nordisk is worth $80 per share. The stock looks overvalued.
One of the biggest sporting events will kick off this weekend. Many fans and gamblers are placing their Super Bowl bets. Are you? Meanwhile, an off-the-field rivalry is intensifying among online gambling companies competing for those wagers. Dan Wasiolek covers the gaming industry. He’s a senior equity analyst for Morningstar Research Services. Thanks for coming to the table, Dan.
Wasiolek: Thanks for having me.
Hampton: FanDuel’s parent company, Flutter, is now listed on the New York Stock Exchange. What does Flutter gain from this move?
Wasiolek: A lot of our viewers are probably familiar with FanDuel, use FanDuel, but even that being the case, what the recent listing on the New York Stock Exchange can do for Flutter is it can further increase that brand awareness for FanDuel in the U.S.
It could also open up new markets or financing opportunities and also allow the company to retain and obtain new talent. All these things can help its competitive positioning.
Hampton: Now, FanDuel’s biggest rival is DraftKings, right? But they’re not the only names in this space. Others are competing for market share and investors. Talk about that.
Wasiolek: It is a competitive market. So in some states you might have dozens of competitors, and the opportunity is attractive. In 2023, U.S. sports betting revenue grew 40% to about $11 billion. Now you’re right—DraftKings is the main competitor to FanDuel. FanDuel has the number-one spot of U.S. sports betting revenue share with about 40%. DraftKings is number two at about 30%. Then the number-three player is BetMGM. Then there’s some other players that are noteworthy. You have ESPN BET, which launched in November of this year with its partner, PENN Entertainment, and has had some early success in getting some share. Then you have companies like Caesars or brands like PointsBets, which is owned by the company Fanatics.
Hampton: A lot of name recognition in those companies. So, the big game is going to kick off in America’s gambling capital, Las Vegas. Some states allow online sports betting, but some don’t. What would it take for that to change?
Wasiolek: Quite a few states legalize or have some form of legalized sports betting at this point, around 40 states, in fact, but we don’t think it ends there. In fact, over the next few years, we think there’s another handful of states that are going to legalize sports betting. A couple that could be quite noteworthy would be Florida and Texas.
Now, the incentive for these states to legalize sports betting is, one major driver would be generating tax revenue, which can be quite substantial. For example, in New York, we calculate that the tax revenue generated per adult by sports betting is equal to that generated for nicotine sales. So it can be quite substantial for state budgets.
Hampton: What names should investors consider if they’re interested in betting on online gambling companies?
Wasiolek: Yeah, so there’s a bunch of different opportunities. If an investor is looking for more of a global exposure to not only sports betting but online gaming, they can look at Roundhill Sports Betting & iGaming ETF. The ticker on that is BETZ. If they’re looking for just a pure play on the North America sports betting market, they can look at companies like DraftKings, which is ticker DKNG. Or FanDuel, which is owned by Flutter, and that ticker is FLTR.
There’s also companies that not only have this online presence in North America but actually own the physical casinos. Some of those companies would be PENN Entertainment, ticker PENN, Caesars, ticker CZR, or MGM, which has the ticker MGM. So it’s an exciting opportunity, and there’s a lot of avenues investors can look to gain exposure to it.
Hampton: Well, Dan, thank you for your time today.
Wasiolek: Thank you.
Hampton: Remembering that investing is for the long term can help quiet some of the market noise. Yet, many investors make and repeat costly mistakes, but that could change with learning a few lessons. Larry Swedroe is the head of financial and economic research with Buckingham Strategic Wealth. The Morningstar contributor is here to share three investing lessons that you could start practicing today.
Welcome to the podcast, Larry.
Larry Swedroe: Thanks for having me, Ivanna.
Hampton: Now, investors could lose out if they chase market performance. You investigated market returns over almost 100 years. Can you talk about what you found when you looked at the S&P 500?
Swedroe: Over the long term, the S&P 500 has returned about 10%. But what most people don’t understand is that most of those returns happen over very short periods. So, for example, if you took the last 97 years of data and extracted the best 97 months, not the best month each year, but the best 97 months. So, one year might be two years, another year you don’t get any. If you eliminate those best 97 months, which is just 8.5% of the data, the average return to the market would have been virtually zero. So that tells you just by intuition that trying to time the market is really a fool’s errand. And last year provided another simple example. From January through October, the Vanguard S&P 500 Index Fund was up about 10.5%, far outperforming, say, the Russell 2000, which had lost 4.5% roughly. But over the next two months, just those two months, the Russell 2000 outperformed the S&P 500 by over 8% in just two months. So, people who were chasing the performance of the first 10 months missed out on the better returns over the last two months. You’re better off having a plan and sticking to it.
Hampton: And let’s talk about another lesson. Why do you say that diversification is working, whether investors think so or not?
Swedroe: Yeah. So, the answer is pretty simple. Why do we diversify? The reason is we don’t want to have all our eggs in one basket because that basket can turn out to do very poorly for a long time. For example, the S&P 500 has underperformed totally riskless Treasury bills for three periods of at least 13 years, 1929 to ‘43, 15 years, ‘66 to ‘82, 17 years, and recently 2012, it underperformed for 13 years. So that’s a total of 45 of the 97 years, right? So, if you only own the S&P 500, you could go for exceptionally long periods. So, we diversify. We own international stocks; we own emerging-markets stocks; we own value stocks that tend to be less represented in the S&P; we might own small stocks, or other risk assets like real estate or reinsurance. Well, the problem for investors is diversification is always working. You’re always getting unique and different returns, which is what you want because if they’re all up at the same time, then when one is down, they could all be down at the same time. So, you have to understand the purpose of diversification is to avoid that concentration or risk. And it’s always working. Last year, you may not have liked the results; in many other years, you certainly would.
Hampton: And 2024 is a presidential election year. You’ve written that you’ve seen people allow their political beliefs influence how they invest. How so, and what’s the lesson?
Swedroe: There’s actually good academic research on this subject, and the results are intuitive. What the research has found that when the party you favor is in power, then you tend to be more optimistic when bad things happen, say 2001 when George Bush was president, then the Republicans would have been more confident about the ability to get out of it, would have stayed through those bear markets. Democrats might have been more likely to feel that he was incompetent, might, couldn’t get us out of the problem, and they would be more likely to panic and sell. Well, the reverse was true under President Obama who followed. The Democrats were more likely to stay the course, thinking that he would get us out of the problem of the great financial crisis, and the Republicans were more likely to go and bail out. And then it went the other way under Trump and now it’s the other way under Biden. So, what we have found is that people when their party is in power, is in favor, they take on more risk. So, they own more equities. That’s a good thing in the long term, of course. And they trade less because they’re not panicking, and the less you trade, the better the results are. And the party when you favor is out of power, the reverse is true. So, the key is you can vote the way you think about social and economic issues, but don’t let your investment strategy be influenced by your political biases because it’s likely to cause you to end up with poor returns.
Hampton: Thank you, Larry, for sharing three lessons investors can keep in mind.
Swedroe: My pleasure.
Hampton: That wraps up this week’s episode. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen, senior audio engineer and producer George Castady, and lead technical producer Scott Halver. I’m Ivanna Hampton, a lead multimedia editor at Morningstar. Take care.
