Market Watch: How can gambling shift its "sin stocks" reputation?

The silver lining to being forced indoors when someone in the family is Covid-ised(-ed?-edated?) is to catch up on some oft-deferred work that usually consumes a disproportionate amount of resources. Such as analysing the performance of gaming stocks. And seeing that the Q2 reports for most companies have just been released, it makes for perfect timing too. Anything to avoid watching the Olympics.

On the face of it, most gaming companies have certainly had a great half-year, clearly up on revenue and profit across most product lines, across quarters and definitely up on 2020. The future for most also looks bright too, particularly with the gradual opening up of state-side markets. Indeed, it would seem that all parts of the gaming ecosystem (operator, supplier, platform, aggregator) have good longer-term prospects.

The stock markets, however, tell a different story. Since publishing their Q2 reports, most of the Nordic gaming stocks are down despite posting increased top- and bottom-line numbers. Apart from Kambi’s nosedive (because of its direct revenue impact from PNG’s acquisition of theScore) most other publicly traded entities have registered single-digit drops when – despite normal rules of physics – they should be up. So, what’s really going on?

Part of this sell-off is due to the ongoing Environmental, Social and Governance (ESG) drive across global fund management, in particular Swedish pension funds. Earlier this year, most of the state-backed pension funds came under flack for failing to focus their investments instead on (much-hyped) ESG stocks. While it’s fair to say that the majority of the ESG heat, pun unintentional, is due to fossil-fuel companies, gaming companies have a harder case to prove when it comes to sustainability. Until a clear scientific case (read: financial and also socio-economical) is made proving that properly managed gambling brings about a better, more sustainable society – as, for instance esports is now claiming – these investments will be relegated to that special circle in hell reserved for the so-called sin stocks.

So, if you’re intending to quit while you’re ahead, you could pick far worse times than good trading results. And broadly speaking, that seems to have been the trend for the last few days. This sell-off is a short-term blip however, and market prices should stabilise in the coming weeks, as they normally do after half-yearly reports.

Good or bad news?

There’s also the likelihood of good-news fatigue. Yes it’s an actual thing – from the same people who brought you “the madness of crowds”. Said fatigue happens when there is too much unrealistic hype and expectation placed on specific company performance, to the extent that when the actual results come in, they are below conflated forecasts leading to good news becoming bad. This has happened a number of times to gaming stocks in recent memory, which resulted in savvy CEOs (we all know who they are) shrewdly reducing guidance on forecasts to perform the great reveal when the results magically outdo expectations.

However, there could be another, more interesting dynamic playing out, and it’s not directly related to gambling. There’s a series of muted concerns happening around fund managers that big tech returns (of which internet gambling forms a part) are finally about to face their winter now that the pandemic boom is over.

Best evidence for this is in the five largest tech companies, or FAAAM (Facebook, Alphabet, Amazon, Apple, Microsoft) stocks. All reported dazzling Q2 performance last week, but only Alphabet’s up – at a paltry 1% – on the news, while all the rest are down almost 8%. The general public is now slowly but surely getting vaccinated and leaving their collective households to conduct activities other than just being normally online. So disposable income shifts from e-commerce to travel, dining and – that bane of humanity – glamping festivals.

If this is the case, online gaming would naturally be one of the first industries to bear the brunt of this change in consumer behaviour. Markets wouldn’t be able to verify this immediately, not on the back of such a sports-intensive Q3, but parallels would definitely be drawn as the year draws to a close.

One of the notable gaming stocks still defying gravity is of course EVO, still basking in the light of recent acquisitions bolstered by stratospheric first-half top-line performance. If there ever was a long-bet surely it would have to be this company. Unless of course these long-term projections are already baked into the current share price, and the Empire has to continue buying up reasonably priced assets to keep investors happy…

So, for one of the first times in recent memory, the silly season has actually become an actual sport for gaming C-level executives and fund managers alike. Now that’s a proper spectator-worthy event. Some might say, even worth speculating on it …