Scientific Games (SGMS) released its latest earnings yesterday, and they were not as bad as feared. The stock jumped and maintains its climb off lows of $3.76 in the aftermath of the corona crash. Shares are now up about 250% since bottoming. The company also remains a clear market leader, so has a new long term uptrend been established here? No. Back in January 2018 the company was a clear short at $56 a share for 2020. If shares keep climbing past the $15-$16 range, which is around technical resistance, then consider reloading your shorts for a 2022 expiry. Scientific may be a market leader, but that’s not enough to keep a company in business.
It takes more than just selling great products to be a great company. You have to be able to sell your products for more than it costs you to produce and maintain them. Otherwise you may have 100% market share and maybe your products are even really popular and beloved in an industry. Still, if the revenues you can command from selling them do not exceed whatever it took you to make or develop them, then it doesn’t matter. You’re going to go bankrupt regardless of the quality of the product or how many customers you may have.
Consider the housing bubble. Were the houses that were built, bad houses? Were they built haphazardly by homebuilders that built inferior real estate? Maybe in some cases, but that wasn’t what caused a systemic housing collapse and homebuilder bankruptcies. Those houses are by and large still standing today, and so will Scientific’s products if and when it goes bankrupt. In the housing crash, it wasn’t the product that was bad, but the financing for it that caused the crash. It’s the same with Uber or Tesla or any of the other company with good products that just can’t be supported by the revenues that can be commanded on the market for them.
Look at Scientific’s latest earnings presentation released yesterday and there are all kinds of impressive numbers in it. 41% market share in North America in the gaming systems market. The deepest portfolio of table games in the world. Some of its games are in the top of their respective categories, which I’m not denying is an accomplishment. Its partnerships are extensive and solid. It has 19 of the top 20 instant game lotteries worldwide. 75% of U.S. instant game retail revenues and 70% global. It is making a big deal about a 10% jump in digital revenues, which is nice and is a result of people stuck in lockdown. But all told it’s only an increase of $7 million in quarterly revenues. That’s nowhere near enough to plug a leaking hull.