Sometimes, investors get too focused on the minutiae and miss the forest for the trees. But the April 8 Market Foolery podcast is an exercise in stepping back and trying to see the big picture. First, it's a discussion of stock dividends, keyed off the fact that dividend king Procter & Gamble (NYSE: PG) has hit a new all-time high. Some investors focus a great deal of attention to yields in their stock picking. But should they?
Next, it's a discussion of a social media company that's deeply reliant on small pictures -- Pinterest just shared the range it's targeting for its yet-to-be-scheduled IPO, and the number looks seriously conservative. Finally, with the championship of the men's NCAA basketball tournament on the agenda for Monday night, there's an awful lot of semi-illicitly wagered money on the line. And that makes it a good time for host Chris Hill and senior analyst Dan Kline to zoom out and consider the outlook for sports betting in the U.S., how long it might be before it's broadly legal, and who might benefit.
To catch full episodes of all the Motley Fool’s free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on April 8, 2019.
Chris Hill: It's Monday, April 8. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from the sunny state of Florida, Dan Kline is in the house. Thanks for being here!
Dan Kline: Happy to be back!
Hill: We're going to dig into the state of sports betting. We're going to talk a little bit about Pinterest because we're starting to get more information about Pinterest. I wanted to start really quick with Procter & Gamble because shares of P&G are hitting an all-time high today. That's fine. That's good for the people who are shareholders. The thing that caught my attention when I saw this story is that P&G has increased their dividend -- we talk about the dividend aristocrats from time to time, companies that have raised their dividend for 25 years in a row or more -- P&G is in that even rarer category of dividend king because they've raised their dividend for 62 years in a row. That blew my mind.
Kline: It's a stunning number. That means they didn't have one bad year where they had to just cut it for financial reasons.
Hill: Right! We've talked on this show a bunch of times over the last year about how challenging the packaged goods industry has been overall. Not that I thought they were going to come out in the past year or two and do that. But it really is a testament to how they manage their business, that they're able to do this.
Before we move on, really quick, what role if any do dividends play in your investing life? Is it something that you look? A lot of people, when they're initially starting out, they tend to think in terms of risk and say, "OK, I'm going to have some growth stocks on one side of my portfolio. On the other side, I'm going to have some blue-chip dividend payers like P&G."
Kline: It's interesting. It's something I talk about a lot. My mother's in that phase of life where income is important and dividend stocks make sense, and security makes sense. In my personal portfolio, I don't think about it. I tend to look at companies that move me. The next one I really want to invest in will be Starbucks. Next time I take a vacation and I'm not writing for a week, I'm going to buy some Starbucks, because that is a daily part of my life and I believe in the brand story. If they were to start paying a dividend, that's great. I own some Microsoft, which does pay a dividend, but it didn't really factor in. What factored in for me there was just how well they pivoted from the Windows 8 dominant. So, I don't think about it, but that's probably terrible advice.
Hill: I don't think about it, even though I have some dividend payers in my portfolio. It's just that I don't look at my portfolio all that often. And when I do, I'm reminded, "Oh, I've got some dividend payers. My cash balance is a little bit higher than it was the last time I looked." Eventually, if you're taking the dividend as opposed to reinvesting in shares, then yeah, that's the proverbial good problem to have.
Kline: It's a nice little bonus.
Hill: Let's move on to Pinterest. Pinterest is next in line for the anticipated IPOs. We don't have a date yet. They filed their S-1 a couple of weeks ago. Now they've come out with their price range. They've set the range at $15 to $17 a share. On the face of it, that seems reasonable.
Kline: It's super conservative.
Hill: Let's talk about that. It's conservative to the point where, the last time we saw numbers regarding what Pinterest is worth on the private markets, if they hit this range, they're going to be valued in the public markets up to $9 billion for the company. That's lower than what we saw in the most recent valuation on the private market.
Kline: It's a little bit lower. I believe the number is actually $11 billion, that this would value them at. The last round was at $12 billion. You don't usually see companies coming out and telling their last round of investors, "You're going to take a little bit of a haircut here. This is not great." Honestly, it seems odd to me, because this is a really great company. I had not thought a lot about Pinterest. I am not, you are not, the target person for Pinterest. It's two-thirds female. About eight in 10 mothers in the U.S. are on Pinterest. But they don't have a lot of debt. The only thing you could argue about Pinterest is they've been so conservative with spending capital, that that does constrain the massive growth. But their advertising numbers have gone up 60% in the past year. Even in the last quarter, they added 41 million monthly active users from a base of 250 to 291. That's stunning!
Hill: Do you think, on any level, what we saw play out with the Lyft IPO factored into how Pinterest set their price range?
Kline: I think when you're a company that's very careful with cash, perception matters. Are they going to cost themselves a little bit of money by pricing low? They are. But they also will put it out there at a place where they're more likely to get that first wave of stories about the IPO being a mild success, instead of what you're having with Lyft. You would think Lyft went to $2. Instead of Lyft being down 10%, a couple of the dollars in the real world, the stories on it make it feel like it's been a disastrous IPO, and Uber should just not IPO. [laughs]
Hill: When you think about, as you said, how conservative Pinterest has been managing their money, maybe this price range makes more sense, particularly if the attitude they're taking is, "Look, we know what our numbers are. We know what our strengths are. By the way, we know what our growth has been. We see the projections in the digital advertising market, and, look, they're not Google. They're not Facebook, and they're not Amazon." We talked recently on Motley Fool Money about Amazon building up their digital ad business. But Pinterest has their niche, they're doing it well. And if they look at that growing digital ad market and say to themselves, "We don't need to get the biggest slice of pie, we just need to get our slice of the pie," they're going to be fine.
Kline: And the ad market, as you said, it's growing. They have a strategy to get more advertisers. They're under-indexed on small businesses. That's an area where Facebook does really well. So they can organically take the audience they already have -- they actually have to be most protective of their community. They have a niche. It's closer to LinkedIn than it is to Facebook. So when you look and say they're speaking to women, they're speaking to people, they have to make sure that their advertising doesn't overwhelm their content. It's great -- if you're on Pinterest and you search for a recipe and you get the recipe, you don't care if it's from your next-door neighbor or from someone who has a vested interest in selling you a particular brand of flour, as long as it's a good recipe. It's really about protecting the content experience. They have an unassailable audience. Facebook can't easily take this, or Twitter, or Amazon, as long as they put the customer first, which we've seen is something Facebook did not do.
Hill: Right. And let's be clear, when we're talking about flour, there's only one choice. It's King Arthur Flour.
Kline: [laughs] I couldn't have named a brand of flour if we had talked for an hour.
Hill: Ohh, no, it's King Arthur! In terms of IPOs, is this something that you look at and you think, "I want to get in, if not the opening day, as close to the opening day as possible"? Or are IPOs something you say, "I don't care how excited I am by the story. I'm waiting three months to see how they do"?
Kline: I hadn't given a lot of thought to Pinterest as a company before you brought up talking about it on the show. And I'm actually super impressed. Normally, I agree. IPOs are about hype. They're much more about what happens to a stock the day after earnings are reported and someone reads the first line of the earnings report and the stock goes down 10%. But I look at the fundamentals of this company, and I can't disagree. When you read the risk section -- you've read those, they're always preposterous. It's like, "What if all of our executives are eaten by bears? The Internet could go away." But, the actual risks to their business are fairly minimal. When you're this conservative with capital -- they only lost $39 million last year. Do you know how much Lyft lost?
Kline: Over $1 billion. $800 million or some stunning number. I think, Uber, it's $1.8 billion in the last year they lost. So, this is a company that has been growing and slowly cutting losses. Let's say there is a zig in their business. Something changes about people's trust in online advertising. They'll have a down quarter and figure it out. It's kind of like the Costco model, but brought across to the internet. I know it's a weird thing, but, Costco goes a very slow and steady. They didn't jump into digital. They looked to see what everyone needed and then they gave their customers just enough. That is how Pinterest is operating. I like that a lot better than the "we make money when we grow 50 times" model.
Hill: Tonight, the NCAA Men's Basketball Championship game is being played between at the University of Virginia and Texas Tech. We have two colleagues who are at the game; one UVA grad and one Texas Tech grad. Good luck to our colleagues Matt and Micah. Hopefully one of them, who will no doubt be bitterly disappointed by the loss --
Kline: Is there a side bet between them, the way governors usually bet something ridiculous?
Hill: I don't know. There very well might be. But I'm glad you mentioned betting. An estimated $8.5 billion has been bet on this tournament alone. The majority of that is illegal betting in office pools, etc. But I wanted to get your thoughts on where we are in the state of sports betting and the ripple effects. We'll get to TV in a second. I do think that's a very interesting piece for investors. But it really does seem like, for all the talk of states in America legalizing marijuana, what's not being covered as much is states on the march to legalize sports betting.
Kline: We're in a really weird tweener time. Betting does not have the stigma that marijuana does. If you're a casual sports better, it is not the same as being a casual illegal marijuana smoker. It wasn't that long ago that, if we did this show, and we talked about an office pool -- I don't know if we have an office pool; I'm not in an office pool -- we'd have to say things like, "It's for Fool dollars!" or pretend and talk around the gambling aspect of it.
Hill: Or just drop the word "allegedly" 50 times.
Kline: Right. But we've gotten to the point where it is totally OK to talk about gambling. They can talk about the line in an NFL telecast. That was never -- you'd get a cryptic comment about a late touchdown, like, "Ooh, a lot of people are going to be unhappy about that!" And you're like, "Why? That just made it 38 to 30." Now, it's very mainstream. You're seeing gambling programming pop up on Fox and ESPN. With most states, this is free money. It's just figuring out how to do it. I'm shocked that where I live hasn't done it yet. I live in Florida. Maryland is on the path to doing it. If you already have casinos that are already in the sports betting business, it's a pretty easy one. I'm pretty sure the MGM down the street will have sports betting the absolute first minute it's legal, and probably already has plans to build it out.
Hill: Eight states have legalized it in some form. Two more -- New York and Arkansas -- have passed the legislation and they're in the implementation phase. There are another 29 states that have legislation pending in their state houses. As you said, with the exception of a couple of states that are probably going to be holdouts on this, it's hard for me to imagine that this isn't going to take hold, particularly when pretty much every state, if not every single state, has a state lottery.
So, it's hard to make the moral argument, "Well, we can't go with sports betting. But, by the way, we have the state lottery."
Kline: Was there ever any enforcement on illegal sports betting? Small-time sports betting. Maybe there were some big-time bookies that got busted in a 1940s movie. But for the most part, you could place a bet if you wanted to place a bet. This just takes something that was either in the shadows, or, the guy at work who walks around with the football card and you're not sure how the money works, this just shines light on it. And it produces money, hopefully, for schools and whatever else they pretend lottery money goes to. I see no reason why this won't be everywhere except, yeah, maybe there's a couple of states that'll be a little reticent for, let's call it morality reasons.
Hill: In terms of investing, if you look at sports betting and say, "OK, I'm an investor, this is something I'm interested in investing my dollars in because I do believe more states are going to legalize this," is it safe to assume that right out of the gate, the bigger, more established names and platforms are likely to be the winners here? You mentioned MGM. MGM Resort is right across the river, National Harbor. Yeah, I look at that and think, aren't they an obvious beneficiary once Maryland approves this?
Kline: It's going to benefit them in a ripple effect way. Not only will you go to the casino to place your sports bet. You will probably have lunch in their sports bar. You might go to the casino. You might stay the night, who knows what else? It's a driver for all sorts of business. It's also a huge driver for TV ratings. Are you going to watch some meaningless regular season baseball game? You might if you put $20 down on it.
Hill: Or if you were just betting on one of the batters on one of the teams, who has a hitting streak, or something like that.
Kline: Having traveled to Vegas a few times this year, I find that if you put a little money on the game, it makes it a lot easier to focus. And yeah, some of those silly side bets, we've all done the Super Bowl -- well, maybe not everybody, but a lot of people have placed like, "what if there's a safety?" "what if the opening kickoff is returned for a touchdown?" That type of thing can just be a few bucks and make something you wouldn't care about really interesting. It's going to be very good for anyone in the sports business, not just the casino companies.
Hill: In terms of TV, because it does seem like among the ripple effects here -- and we're already seeing this play out in programming. I remember doing a couple of interviews with affiliate radio stations for Motley Fool Money last year, when the Supreme Court decision was handed down. Talking to whoever the host was, saying, I think one of the things we're going to be seeing here is programming. If you're programming sports talk radio or TV, expect to see, specifically, not just we're mentioning the football line during a football broadcast, but expect to see programs around betting. And we're seeing that play out.
Kline: And, we're seeing the people who always did it. Bill Simmons practically took a victory lap when this passed because he always did the line. He always talked about this type of thing. Now you've got daily programming on FS1, daily programming on ESPN+, and you see SportsCenter segments on this. This takes something, it's not fully legal, but we're all doing it, and now it's legal enough that yeah, it's going to drive secondary programming.
The other thing is, let's hope it drives a little bit of education. Throwing $20 down on a game if you can afford it is great. There are a lot of pitfalls and holes you can fall into with sports gambling. Those get a lot worse when they're legal.
Hill: Last thing before I let you get back to your actual job. A couple of years ago, a story that was making the rounds both in the business media and in the media that covers media, was about sports rights being in a bubble. They were saying, "Look, TV networks paying increasing amounts for the rights to NFL games, Major League Baseball, the NBA, etc., this is getting into bubble territory and it's going to pop at some point." We're not hearing those stories anymore. And I look at what's happening with sports betting and think to myself, "I think this helps keep the sports rights inflated."
Kline: I never believed in a bubble for the major sports. I think the NFL is always going to get what it wants. That might be at the expense of diluting the product or having to go to some outlets that are maybe harder to find. Baseball, we've seen, to keep its rights up has kind of an unfortunate deal where some of its games air on channels you can't find. You don't want your marquee game to be on FS2.
But I think this absolutely drives rights up. It should drive ratings up. It's also going to drive more people to be willing to pay for rights on platforms like DAZN and ESPN+ where they're just throwing money at anything that's sports. Are more people going to watch a UFC Fight Night because they can throw some money on it? I think in that audience, absolutely, they are. Is golf more interesting when you have someone in the field, and you bet a few bucks, and he's in contention? Yeah.
This is great for sports. The casinos are the first beneficiaries, but there's going to be a lot of money made here.
Hill: That's the thing that makes me want to hit the fast-forward button. Let's get to 2021 or 2022. I'm curious to see which are the platforms that rise up in valuation. Which are the platforms that help drive valuations of parent companies higher in the same way that Disney breaks out their revenue in terms of, "Here's what we did in Studios. Here's what we did in Resorts and Parks," that sort of thing. Does ESPN+ get big enough that they start breaking that out on its own? I don't know.
Kline: I think they're going to start breaking out that segment once they launch Disney+ and figure out what to do with Hulu. I think they'll have to give you some numbers. But we're talking spending a lot of money for a long time on platforms like that.
Hill: Absolutely. Dan Kline, always good talking to you! Thanks for being here!
Kline: Thanks for having me!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Chris Hill has no position in any of the stocks mentioned. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Costco Wholesale, Facebook, Microsoft, Starbucks, Twitter, and Walt Disney. The Motley Fool is short shares of Procter & Gamble. The Motley Fool has a disclosure policy.