Will Sports Betting Replace Spending Allowances on Sports Collectibles?

The Hobby of sports collectibles endures many changes over time. Modern cards are always a focus because they contain all the great modern day players who are dominating their sports. But without an MLB/MLBPA deal being reached, now opening day is being cancelled along with the first two series of games (and some of us expect at least 30 games being cancelled). This is bad for collectors of modern day cardboard heroes. It is also bad for the MLB teams, the owners and the players. Is it possible that DraftKings Inc. (NASDAQ: DKNG) is still a big winner here? And is it possible that “sports investors” will simply just revert back to “regular investors” and “gamblers” again?

Collectors Dashboard evaluates collectibles as an alternative asset class. This implies that same capital that could have been invested into stocks or bonds is being used to buy high-end collectibles. We also assume that, for those of us without unlimited means, that many collectors (like investors) have certain spending allowances and limitations on how much they can invest at any given time. The inverse of the alternative asset class assumption is that most collectors who are viewing sports collectibles as an investment will also evaluate their capital allocation and may forego buying a collectible to fund a great stock or bond investment. After all, a profit is a profit — and a 40% gain in a stock may have a better net-net after-tax gains than an implied 40% gain in a collectible.

You can assign blame on the MLB owners all day for a shortened season. Or you can say the MLBPA players’ total package of asks was just too much all at once for a shortened season. However you feel about the MLB/MLBPA blame is up to you and Collectors Dashboard isn’t going to try to sway your opinion either way.

One question immediately comes to mind — This MLB/MLBPA failure has to be bad for gambling, right? Not according to Morgan Stanley’s stock research team. Morgan Stanley already has an Overweight rating and a $31.00 per share price target that implies roughly 40% upside to $DKNG stock investors if they are right. Now the firm designated $DKNG as its “Top Pick” for clients.

Be advised that Collectors Dashboard is not endorsing this report nor is it bashing this analyst report and we are assuming that this was not a news-based call, which appears to be the case. This is provided for informational purposes only. In fact, the guts and rationale of the analyst report do not even contain the words “MLB.” The words also do not contain the word “baseball” even one time, nor do they mention the word “collectible(s)” even once.

Thomas Allen, the top analyst issuing the $DKNG report, said:

We expect the US online sports betting / iGaming market to be very large, with a few market share winners, including DraftKings. Global precedents highlight scaled OSB / iGaming players have attractive, profitable businesses. We expect the market to come around to this view, our $31 PT implies 40% upside.

Among the positives is that $DKNG stock is down 70% from its 52-week high, versus the S&P 500 only down about 10% from its 52-week high. Morgan Stanley feels that investors have overly focused on significant near-term losses and questioning whether the U.S. online sports betting and iGaming market — and whether $DKNG will ever be profitable. The report is a reminder that the stock market is not supposed to only focus on the news of the day and focus out into the months (or even years) ahead. Morgan Stanley said in its report:

While we agree that short-term losses will be considerable (still Street-low on 2022e EBITDA despite recent guidance), we believe the market is too short-sighted and our state-by-state profitability build suggests long-term profitability to be much larger than forecasted. Public international stocks show that sports betting / iGaming is a profitable business, while past precedents show that stocks that can transition from revenue to profit stories deliver significant upside.

Morgan Stanley also expects that $DKNG will outperform on revenue expectations in 2022 and further reinforce the significant total addressable market opportunity even though EBITDA losses will be wider than expected.

This call comes with some risk or opportunity for investors because of the DraftKings Analyst Day event on March 3 (just one day out), but Morgan Stanley’s report noted — “…admittedly we don’t expect it to be a major catalyst. The company just reported earnings on February 18 and has hosted March analyst days the past 2 years, suggesting this is more of an update than a major change in direction.”

One concern about the operations of the company was that the earnings disappointment came with a not by management that $DKNG does not need incremental capital to reach profitability. The Morgan Stanley view is “…we believe that its balance sheet may get stretched in 2023, especially if CA legalizes online sports betting this November.”

Here are two more positive catalysts for “sports investors.” Morgan Stanley forecasts legal U.S. sports betting and the iGaming markets to increase from what was under $1.5 billion in 2019 up to $20.6 billion in 2025. It expects more states to legalize these markets and it also sees the spend per capita rising — implying that we are all just going to be spending more on gambling than we do today. Another assumption is that $DKNG will maintain the top tier share with 24% in online sports betting and 21% share in iGaming in 2025. And another assumption is that the mature states will become more profitable.

The “bull case” and the “bear case” will show some exponential upside, but it also shows that the risks are huge if the market or the economics behind gambling do not pan out. The bullish case with a larger market and a larger market share would be that $DKNG stock rises to $81 (about 10% higher than it has ever traded to date). The “bear case” is that $DKNG stock could fall to $4.00 (implying about 80% downside) based on a much smaller total market development and also a loss in market share.

DraftKings shares were initially up 2% at $24.00 shortly after its stock opened for trading, but the stock was then down about 2% at $23.00 within less than 30 minutes of trading. It still has a market cap of about $9.8 billion and its 52-week trading range is $16.56 to $74.38.

When $DKNG reported its disappointing earnings its shares fell from $22.06 down to $17.29, a drop of more than 21% in a single trading day that also saw nearly $1.4 billion worth of shares trade in that single day. And now its shares have “round tripped” back to above where it was before that news.

As Collectors Dashboard evaluates collectibles as an alternative asset class, we have to point out that assumptions of returns come to mind for many sports card and collectibles investors – just like they do for stocks. Do you buy looking for a loss? Do you buy looking for a small gain? Or do you buy just because you love the collectibles with no care about future values? Those are up to you but just remember what investing in sports collectibles has in common with investing in stocks or bonds —

  • no guaranteed profits
  • you may lose a significant portion or all of your money
  • past performance may have nothing to do with future performance
  • analysts are often wrong in their forecasts and assumptions
  • “price targets” may be immaterial or just wrong

A weekly chart of $DKNG has been provided below using the weekly chart.