2023-04-25 06:15:49 ET
Summary
- BJK is a diversified ETF that invests in the global gaming industry.
- That industry is growing rapidly, but the market may have already priced in those growth expectations.
- I rate BJK a Hold. It has outperformed the S&P 500 by over 10% YTD, and its valuation is too rich for me to assign a higher rating right now.
The VanEck Gaming ETF ( BJK ) tracks the MVIS Global Gaming Index. Gaming includes casinos and casino hotels, sports betting, lottery services, and gaming services.
I have personally never gambled (yes, there are some on planet earth who haven’t!) However, I am curious about the hype surrounding the industry. Because while I don’t gamble, I certainly do invest. And with the gross revenue for the gaming industry in the United States alone now topping $60 billion and growing, I see strong odds that this could be an investable part of my portfolio one day (pun intended!) Furthermore, non-US gaming is also gaining popularity, driven by a growing middle class with increased disposable income.
In the past, gambling was predominantly confined to physical casinos and other brick-and-mortar establishments. The advent of the internet and mobile devices has made it possible for people to gamble from anywhere in the world. This has led to a boom in the gambling industry, as more and more people are now able to participate in it. In fact, I’d argue that online gaming has transformed this industry, and made it ubiquitous. That’s good for long-term profit potential. That should provide strong tailwinds for the stocks companies BJK tends to own.
My bottom-line rating on BJK is currently a Hold. But like many ETFs I cover, that rating is driven more by the lack of a significant immediate catalyst, and the headwinds of a highly-uncertain global economy in the near-term. Enough of the future potential of BJK is currently reflected in the price to limit my enthusiasm for the time being.
Review of Key Factors
BJK is domiciled in the United States, but it also invests in companies in Europe and the Asia/Pacific region. The ETF's holdings are 90% consumer discretionary and 10% real estate. The 10% real estate allocation is in traditional brick-and-mortar casinos, and most of these companies have exposure to both online and traditional gambling. This diversification makes BJK more than a pure-play online betting ETF.
BJK holds 45 stocks, and the top 10 holdings make up almost 60% of the portfolio. This means that the performance of BJK is likely to be driven by the performance of its top 10 holdings. However, BJK also has some diversification, as its holdings are spread across different geographies and segments of the gaming industry. The top holding (at around 9% of assets) is Flutter Entertainment ( PDYPY ) the Ireland-based company that owns FanDuel, the most popular online sports betting site in the US with roughly a 40% market share.
Current Bull Case
Statista reported sports betting as the most popular type of online gambling closely followed by the lottery. Regulation around sports betting is easing leading to an accelerated expansion in sports betting in the USA. As more states legalize sports betting, the market is growing quickly. Not only are new states easing restrictions, but betting is growing more popular each year in states that have already legalized it. Sports revenue is rapidly growing, with 72% year over year in 2022. The American Gaming Association estimated ¾ of March Madness US college basketball tournament online bettors were first-time bettors on that immensely popular sporting event. As the popularity of sports betting continues to grow, with both existing and new participants, it should support demand for the companies in BJK. However, the increasing popularity and easing regulations may already be baked into market sentiment.
Earlier this year, all travel restrictions on visitors entering China were lifted. This includes Macau, a special administrative region of China that is well known for its temples, Portuguese architecture, and casinos. The reopening of Macau may boost the earnings of the casino companies located there, including Las Vegas Sands ( LVS ) BJK’s second-largest holding. LVS reported earnings on April 19 and beat street expectations driven by a robust recovery in travel and tourism especially in Macau and Singapore. Macau is in the early stage of recovery and there is room for further recovery.
Current Bear Case
Flutter Entertainment Plc ( PDYPY )
Evolution AB ( EVVTY )
Galaxy Entertainment Group Limited ( GXYEF )
Aristocrat Leisure Limited ( ARLUF )
MGM Resorts International ( MGM )
DraftKings Inc. ( DKNG )
Gaming and Leisure Properties, Inc. ( GLPI )
BJK is up almost 20% this year as of this article and 4 of the top ten holdings (PDYPY, EVVTY, MGM, and DKNG) are up over 30% YTD. This is a significant outperformance relative to the broader market, the S&P 500 is only up 10% this year.
According to Seeking Alpha’s quant grades, valuations are quite rich for some companies in BJK. Please see the ratings for BJK’s top 10 holdings below. High valuations require strong growth, which may be difficult to achieve in the current market.
Gaming is often seen as a "sin stock" and is even considered to be on the wrong side of ESG (Environmental, Social, and Governance) investing. The gaming industry faces environmental challenges such as carbon emissions, and social challenges such as responsible gaming concerns and support for at-risk customers. These factors could lead to BJK being screened out of investors' portfolios, impacting BJK's return potential.
Furthermore, customer acquisition costs are high especially in the sports betting industry, impacting net income margins. Four of the top ten holdings are operating at a net loss: PDYPY, GXYEF, SCHYY, and DKNG.
Current Investment Opinion
BJK has strong growth potential. However, the market already knows this, and I find the risk/reward profile is less attractive than the alternatives. As a result, BJK is a Hold for now. However, if BJK were to pull back to a more attractive entry point, I would reassess my analysis.
For further details see:
BJK: Risk/Reward Profile Is Less Attractive Than Peers