ASX corporate bookmaker Pointsbet Holdings Limited (ASX: PBH) has already had to endure a wild start to 2020.
After soaring to a record high price of $6.65 in January, the Pointsbet share price plummeted in February and March, falling as low as $1.10.
The Pointsbet share price has recovered more recently as some hesitant optimism has returned to the broader market. As at the time of writing it had edged all the way back up to $4.05, its highest price in close to two months.
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What has driven the volatility?
Tight social restrictions imposed by governments across the world in efforts to fight the spread of the coronavirus have disrupted entire sectors of the economy. Global stock markets crashed throughout February and March as investors tried to price in the impacts the restrictions would have on company profits.
Few companies were immune from the rout. In the space of about a month, beginning in late February, the S&P/ASX 200 Index (ASX: XJO) shed over 30% of its value. Big name companies like Cochlear Limited (ASX: COH) and Altium Limited (ASX: ALU) were forced to withdraw their full year earnings guidance completely.
But the damage to the Pointsbet share price was particularly harsh, for a couple of reasons. Firstly, it was a growth stock that was already trading at fairly lofty valuations in anticipation of strong future revenues. Early investors who had seen the value of their holdings rise during 2019 decided to de-risk their portfolios by taking some of their profits off the table. Other prominent growth stocks like Afterpay Limited (ASX: APT) and WiseTech Global Limited (ASX: WTC) experienced similarly sharp drops in their share prices (though not quite to the same magnitude as Pointsbet).
The more important reason behind the massive decline in Pointsbet's share price was its hefty exposure to the most immediate, tangible fallout from the coronavirus crisis: the cancellation of sporting events.
The damage to global sporting codes was swift and incredibly severe, with many prominent leagues in Australia and the US indefinitely postponing their seasons. This shock to the global sporting industry was unprecedented in modern times and meant bookmakers like Pointsbet suddenly had fewer sources of income. Rival online bookmaker Sportsbet even started accepting bets on the weather as a way to make up for lost revenues.
For its part, Pointsbet has tried to reassure investors of its ability to successfully navigate these tough conditions. Back in March, in response to COVID-19 and the cancellation of sporting leagues, Pointsbet issued an update to the market on the strength of its balance sheet. The company has close to $150 million worth of cash and nil borrowings, which it claims give it the resources to survive the crisis.
Should you invest in Pointsbet?
With so much uncertainty around when the world's major sporting codes will return – and in what format – it is difficult to recommend an investment in Pointsbet. It just seems too risky at the moment. However, as a shareholder myself, I'm not in a hurry to sell the shares I currently own.
Pointsbet released its results for the March quarter last week, in which it reported its first positive EBITDA quarter for its Australian Trading Business. This is a significant milestone, although the results would not yet have captured the full impacts of the coronavirus pandemic, considering major Australian sporting codes like the AFL and NRL didn't start suspending their seasons until towards the end of March.
The company did state that it was experiencing material negative impacts from sports cancellations in its US operations. However, one positive sign for the Australian business was that Pointsbet had seen higher volumes bet on thoroughbred, harness and greyhound racing, which is generally higher margin.
The next quarter will be the hardest for Pointsbet to get through, which is why recommending an investment in the company now seems too risky. But for existing shareholders there is still room to feel optimistic. A strong balance sheet combined with increased demand for higher margin racing products will hopefully be enough to see the company through the crisis.
