Admittedly, Golden Nugget Online Gaming (NASDAQ:GNOG) is one of those companies that got away from me the moment my take was published. After I cautioned against a wager on GNOG stock, shares immediately went on a run toward $25. Then, following a mild correction, they charged above $26.
Since then, however, GNOG stock has endured a sharp correction. At time of writing, shares are priced at $21. What does this imply moving forward?
Last month, I was worried about the economic risks sparked by the novel coronavirus pandemic. From historical data, gambling-related revenue weakened during the Great Recession. Obviously, the incentive to put your money at risk during a downturn isn’t quite as strong as during a bull market. However, I underestimated the power of the SPAC (special purpose acquisition company).
Still, the bullish argument for GNOG stock involves more than speculation. For instance, clinical research indicates that among gambling activities, lottery consumption may be recession-proof. “Because it is such an inexpensive product, it is probably not one of the first things that are cut from the regular monthly budget.”
As well, “Lotteries can provide some hope to improve the overall circumstances significantly, for a reasonably low cost.” Additional academic research confirms these points. Further, I believe that the availability and ease of access of lotteries makes them resilient to economic pressure.
Therefore, it’s reasonable that GNOG stock can benefit from such psychological tailwinds. Thanks to increasingly favorable legislation, Golden Nugget will be able to deliver the gaming experience to consumers conveniently and without person-to-person contact.
It’s done wonders for trading app Robinhood. But is this sustainable for 2021 and beyond?
The ‘Full Circle’ Argument for GNOG Stock
At the risk of getting it wrong again, I’m going to reiterate my cautious argument for GNOG stock. Mostly, I believe there’s an abundance of evidence that the economy is not recovering the way we need to inspire the kind of discretionary consumer sentiment that companies like Golden Nugget require. Thus, I still see “more incentive in waiting than taking a wild wager.”
Let’s start with the obvious: last month’s jobs report. Heading into the disclosure, economists anticipated that 50,000 jobs were added, which was already poor against the prior month’s comparison. In November, the labor market added 245,000 jobs. However, the actual result saw the economy shed 140,000 employment positions.
To be fair, evidence indicates that the drop was mostly due to the novel coronavirus, not any infrastructural reasons. As vaccines are distributed at scale, we should see the economy normalize, which would be excellent news for GNOG stock.
However, we don’t have a timeline for when the Covid-19 crisis will finally fade. Certainly, the U.S. has had a heck of a time trying to control the outbreak. But the critical factor here is what it may have done to the broader consumer psyche.
As I noted earlier, research papers support the idea that certain gambling platforms (i.e., lotteries) were resilient during the Great Recession. Back throughout that downturn, the increase in the personal saving rate and the decrease in money velocity were relatively modest, all things considered. Yes, there were substantial percentage changes in the metrics, but the practical effect wasn’t paradigm-altering.
But that might not be the case with the present crisis. Today, the personal saving rate is at multi-year highs while money velocity is near all-time lows. Both metrics are deflationary, as it indicates that not enough money is circulating in the economy and whatever money is earned is largely saved.
Obviously, deflation is the enemy of any fiscal stimulus programs. And this severe magnitude of deflation is something we haven’t seen since the Great Depression.
Administrative Factors May Also Impact Golden Nugget
Interestingly, my InvestorPlace colleagues Sarah Smith and Larry Ramer note some activities that may affect GNOG stock. Apparently, Golden Nugget founder and owner Tilman Fertitta has been exploring an initial public offering for some of his holdings. Ramer writes:
As a result, investors may wonder whether Fertitta could look to sell some of his GNOG stock, causing the shares to tumble.
And as Smith noted, the billionaire has “borrowed hundreds of millions of dollars,” generally creating uncertainty for his empire, including Golden Nugget Online Gaming.
I believe these factors add to the main risks from the economy. Granted, if we recover from the coronavirus pandemic much sooner than anticipated, GNOG stock could rise. However, the smarter play suggests waiting on the sidelines for a better read.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.