Two Ways to Invest in the Fantasy Sports Boom
It would be an understatement to describe the Internet as a groundbreaking innovation; its ascent has truly marked the beginning of a high-tech paradigm shift, where the lines between the cybernetic and physical worlds have become smudged. Seemingly unnoticed by most of the blogosphere, this technology has been a blessing for fantasy sports. What once was a niche market made up of sabermetricians and Bill James devotees has become mainstream, responsible for generating $3 to $4 billion dollars in revenue each year.
To the casual spectator, joining a fantasy sports league may seem like a foolish attempt to capture the competitive glory privy to superstar athletes like Albert Pujols, Aaron Rodgers, and yes, even Jeremy Lin. In your mother’s mind, it is an effort to conjure up the prepubescent success of your fifth grade tee ball team, and in your girlfriend’s eyes, it is an excuse to chill with the bros. While both of these reasons are at least partially responsible for the fantasy sports boom, its real value is that it gives fans a tangible reason to watch their favorite pastime even if their local team is awful.
As discussed in this article, Americans’ attendance at sporting events has been steadily increasing over the past decade, but their fantasy participation has been growing at an even quicker rate. Consider these statistics: over the past five years, the size of this virtual arena has grown by 60%, and now eclipses 32 million people. Even more telling, is that out of the country’s entire population of males aged 12 years and older, one-fifth partake in fantasy sports each year. Here are the two major players in this market; taking a position in these companies may yield a better reward than any fantasy league title ever could.
While sites do not release official user statistics, it is widely speculated that Yahoo! (NASDAQ: YHOO) Fantasy Sports has the most user accounts, as it offers free membership, advice, and a functional, yet clunky way to track player stats, as seen here. In addition to user-created leagues, Yahoo also offers pay-to-play “Pro” leagues, in which the most dedicated players can compete for prizes up to $500. The company also generates revenue from its premium content, most notably its “Scouting Report” and “Yahoo! Trade Review” services. Both options cost $14.99 per season, but are not integral to the site’s overall experience, as a bevy of analysis is offered at no cost; it is this free content that is Yahoo’s biggest plus over its competitors. According to this report, the predictions of Yahoo experts consistently outperform those of ESPN staff members in every significant area. Aside from this drawback, ESPN also offers a solid platform with its own unique advantages.
Owned by The Walt Disney Company (NYSE: DIS), ESPN has a much broader reach into the sports community, as it is able to market its fantasy sports service through three cable TV channels, most notably on its nightly broadcast of Sportscenter. While roster managers are better served reading the opinions of Yahoo columnists, it is clear that ESPN is the superior news aggregator. For example, if I were concerned about checking up on the injury status of my star shortstop, à la Troy Tulowitzki, I would have a better chance of discovering this news on one of ESPN’s various outlets first. Within ESPN.com’s Fantasy Sports community, users are given the option to compete in their own leagues or in a range of other games, such as “Streak for the Cash,” where fantasy diehards are allowed to place bets on numerous sports happenings. Even though Yahoo has the larger user base, ESPN.com has historically received the most traffic, as it has averaged over 40 million unique visitors each month since 2006; this accounts for almost one-third of all sports-related activity online.
From an investing standpoint, both stocks have been up by nearly 2% over the past month, although Disney has been far kinder to the portfolio year-to-date, returning 27.6% to Yahoo’s -3.0%. Using the PEG ratio, which is explained in further detail here, both look to be fairly valued, with Disney (1.0) trading at a cheaper multiple than Yahoo (1.6), though its annualized EPS (3.4%) has grown at a far slower rate than Yahoo’s (41.4%) since the recession.
Going forward, analysts are forecasting a modest slowdown in Yahoo’s growth, as consensus is expecting a year-end EPS of $0.95 a share, 13.9% higher than 2011. By 2013, this figure is anticipated to increase by 14.3% to $1.08. Assuming these estimates hold, fairly valued shares of Yahoo should rise above $17 by Christmastime; they currently trade in the $15 range. Looking at Disney, the Street is predicting a year-over-year earnings jump of 18.4% to $3.01 a share, and a ’13 increase of 15.2% to $3.46. In this year’s first quarter, the company beat EPS estimates by double-digits, citing increased popularity of ESPN and its related services. If Disney’s stock can maintain its current valuation, it will likely rise above $51 a share by the end of 2012; it currently trades near $47.
WealthLift’s Sentiment Index rates Disney as a strong buy, with 96.5% of the community’s users placing an “overperform” rating on the stock. Yahoo, meanwhile, is rated as a hold, with just 60.0% of users choosing an “overperform” rating. While it remains to be seen if one of these companies will begin to take an even more dominant foothold in the fantasy sports community, both look like great ways to get exposed to this ever-growing industry. Until the day comes when playoffs include every single team, there will always be a demand for fantasy sports. Heck, it might even give you some extra time with the bros, or let you relive those tee ball glory days.
Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.