Take-Two Rallies on GTA VI Hype, C3.ai Demand Uplift, Record Sports Betting

Around the Markets:

Stocks and bond yields rose last week as the market awaits a resolution to the debt ceiling in Washington and assesses the resulting outlook for growth, inflation and the overall economy and its impact on monetary policy. Congressional leaders met with President Biden on Tuesday and appeared closer to a deal than a week earlier. There remains little time to reach a deal and pass legislation in both houses of congress before the expected June 1 deadline at which the U.S. would reach the debt ceiling, as estimated by Treasury Secretary Janet Yellen.

Past performance is not indicative of future performance. The Index returns above are presented for illustrative purposes only. The index returns presented herein do not represent the results of actual trading in investable assets and securities. Index returns do not consider other expenses you may incur when investing or trading an investment strategy, which include, but are not limited to, advisory/management fees, custodian fees and trading fees/commissions. You cannot invest directly in an index.

Source: Bloomberg
Note: Bond yield change in basis points (1 basis point = 0.01%)

In Case You Missed it: In case you missed any of our latest research, here is a selection of some of the blogs we have recently published. You can find all of our research, including archived versions of older newsletters, on our website. And follow us on Twitter, Instagram and LinkedIn for more content.

• Sizing up the Generative AI Opportunity: $120 Billion+ in Enterprise TAM
• What Are Large Language Models and Why Are They Crucial to Generative AI?
• Around the Hill Volume 8 - As Inflation Cools, Where Next for the Fed?
• ChatGPT, Generative AI and Video Games - the Next Big Thing or the Next Big Fad?
  

Take-Two Surges as Outlook Points to Holiday 2024 GTA VI Release

Take-Two’s shares surged 11.7% on May 18 (Bloomberg, May 19, 2023) after the company provided an outlook for the year-ending March 2025 that suggests the release of Grand Theft Auto VI (GTA VI) in the year. This outlook overshadowed a weak forecast for the fiscal year-ending March 2024.

U.S. Sports Betting Wins a New Record in Q1 With $31 Billion of Wagers

Total wagers on sports betting in the U.S. notched a record $31.1 billion in Q1 2023, according to the American Gaming Association, as gross gaming revenue reached $2.8 billion. Handle increased 15.1% year-over-year, fueled by new state launches like Ohio and Massachusetts but also with established markets seeing expansion.

Our Take:

The secular tailwinds for sports betting growth in the U.S. remain in place and the first quarter results from the AGA reflect the ongoing groundswell of momentum in the sector. Even as growth rates inevitably cool off as large markets like New York, New Jersey and Pennsylvania mature, there still remains underlying strength.

The AGA noted that, of the 26 markets that were in operation in Q1 of 2022, 15 of them posted year-over-year growth in total handle. There’s visibility for four more states to launch services over the next few months, with North Carolina, Minnesota, Vermont and Kentucky close to legalization and launching online sports betting services, according to DraftKings. That would increase the population covered by online sports betting to roughly 53% from roughly 47% currently.

Looking ahead, as the market enters a more mature phase of lower growth and higher profitability for the largest sportsbooks, smaller peers may look to exit the market and consolidation may occur. Pointsbet has already agreed to sell its U.S. operations to Fanatics for $150 million (more on that below) and other smaller peers may consider following suit given the capital required to attempt to catch up to leaders FanDuel, DraftKings and BetMGM.

Investment Themes
Sports Betting

Pointsbet Exits the U.S. - Is the Rest of the Company Now on the Block?

Pointsbet shares slumped 20.4% on May 15 (Bloomberg, May 19, 2023) after the company agreed to sell its U.S. sports betting operations to Fanatics for $150 million. Upon closing, Pointsbet plans to pay out a dividend of A$1.07 - A$1.10 vs. its May 19 closing price of A$1.55.

Our Take:

Pointsbet’s U.S. exit was well telegraphed in advance and the sale makes sense form a strategic perspective - the company was unable to compete with the hefty marketing and user acquisition spend from larger rivals like DraftKings, Flutter’s FanDuel and BetMGM (a joint venture between MGM and Entain). Fanatics, who is well-capitalized with total venture funding nearing $5 billion over its lifetime according to Crunchbase, likely has more capacity to invest in these areas.

The focus for Pointsbet now shifts to what it does next with its remaining operations in Australia and Canada, which it expects to be roughly breakeven on an EBITDA basis. Pointsbet previously held discussions with Betr for the business, it disclosed in a statement, with Bell Potter analyst Chris Savage noting that the rumored sale price for the business is roughly double the market value of the remaining operations.

Still, Pointsbet’s shares reacted negatively to the news. There may have been some “sell-the-news” mentality at play as the shares had gained 65% from a low on April 13 to May 11. The deal is also structured in phases such that Pointsbet transfers licenses to Fanatics in only a few states at a time, which could point to some concern that state regulators may not approve the deal. And per Pointsbet’s statement, the company isn’t due a breakup fee from Fanatics if the deal falls through.

Investment Themes
Sports Betting

Ubisoft Shares Volatile as Company Enters a “Show-Me” Year for New Releases

Ubisoft’s shares fell 1.1% on May 17 (Bloomberg, May 19, 2023) after falling as much as 11% earlier in the day after the company reported results for the year-ending March 2023 and reiterated its outlook for the year-ending March 2024. The company expects to release eight new games in fiscal 2024, including a new Assassin’s Creed, its Avatar game and Rainbow Six Mobile.

Our Take:

Fiscal 2024 is a show-me year for Ubisoft, a company who has struggled for years with bringing a consistent cadence of new games to market on time and at the necessary quality to justify the scale of investment in them. After a fiscal 2023 marked with development delays and cost cuts to improve profitability, these key titles need to be successes to ensure Ubisoft can keep investing in what remains a promising pipeline of new titles.

The company’s lineup for fiscal 2024, aside from the above mentioned titles, also includes the long-delayed Skull & Bones, a new entry in the Crew franchise, the Division Resurgence, XDefiant and an unnamed large game. This large new release slate is fueling its outlook for adjusted operating income of approximately 400 million euros for the year vs. a loss of 500 million euros in the previous year.

Longer-term, Ubisoft needs better execution to bring a consistent cadence of new games to market to drive consistent profits and reduce year-to-year volatility around large releases. It also needs more of these titles to sell more units and drive a longer-tail of retention with live services to improve its margins via economies of scale. Even with a bounce back in profits in fiscal 2024, Ubisoft’s operating margin is projected to significantly lag peers such as Electronic Arts.

Investment Themes
Gaming

Western Alliance Deposits Rise as Regional Banking Fears Ease

Western Alliance Bancorp’s shares rallied 10.2% on May 17 (Bloomberg, May 19, 2023) after the company said that it had gained an additional $200 million of deposits since May 9. This brings its total quarter-to-date deposit inflows to $2 billion vs. its total deposits of $47.6 billion at the end of Q1.

Our Take:

Western Alliance’s update provides a bit of relief for regional banks who have seen deposit outflows in the wake of the collapse of Silicon Valley Bank, Signature Bank, Silvergate Capital and First Republic Bank. Stabilizing deposits is an encouraging sign that the worst of the crisis is past but it by no means confirms we are out of the woods just yet.

Even after gaining $2 billion of deposits quarter-to-date, Western Alliance’s deposit base is still down about $6 billion from the peak in Q3 2022. Some risks also remain, such as concern over the health of the commercial real estate market, suggesting focus on the bank and its peers won’t abate any time soon.

The 10.2% rally on May 17 still leaves Western Alliance’s shares down 42.4% year-to-date, underperforming the S&P Regional Banks Select Industry Index’s 31.5% drop (Bloomberg, May 19, 2023). 

Investment Themes
Banks

Source: Discord, Goldman Sachs Investment Research as of 5/4/2023

Did you know that Midjourney, the text-to-image generative AI software, is now the largest Discord server? See it's growth in our chart of the week via Goldman Sachs.

The information contained in this newsletter is for informational purposes only and does not constitute financial, investment, tax or legal advice. The information expressed herein reflects the opinion of Roundhill Investments (“Roundhill”) on the date of production and are subject to change at any time without notice due to various factors, including changing market conditions. Where data is presented that is prepared by third parties, such information will be cited, and these sources have been deemed to be reliable. Roundhill is separate and unaffiliated from any third parties listed herein and is not responsible for their products, services, policies or their content. All investments are subject to varying degrees of risk, including the risk of the loss of capital, and there can be no assurance that the future performance of any specific company, strategy or product referenced directly or indirectly in this newsletter will be profitable, perform equally to any corresponding indicated historical performance level(s), or be suitable for your portfolio. Past performance is not an indicator of future results.