The Advantages of Being the Only 'Pure Play' in the Market

In the past year, few stocks have accumulated as much hype and exuberance (some may say irrationally so) as Beyond Meat (NYSE:BYND), Tesla (NASDAQ:TSLA) and Virgin Galactic (NYSE:SPCE). While they are very different companies, they do share one very important characteristic in the eyes of investors: they are the only 'pure play' on the market in a nascent, future-relevant industry. When I use the term 'pure play', it is not to indicate that these companies have a monopoly in their respective industries, far from it, but that they are the only publicly-traded company (or in Tesla's case the best option by quite a distance) whose sole focus is this future-relevant trend. 

You don't have to be Nostradamus to know that vegetarianism and veganism are going to be more prominent lifestyles in the future. It is an easily identifiable trend and yet there are very few public companies that are set to capitalize. While Beyond has competitors in the meat-alternative space like Nestle (SWX:NESN) and Tyson (NYSE:TSN), it accounts for a tiny portion of overall operations for these businesses. Beyond's primary like-for-like competitor, Impossible Foods, is a private company. This means that retail investors who believe in a meat-free future have very little options to choose from, an issue becoming less and less common for vegans ironically. 

The same can be said for both space exploration and electric vehicles. Virgin Galactic is not the only one vying for constellation supremacy. SpaceX and Amazon (NASDAQ:AMZN) CEO Jeff Bezos' Blue Origin are both arguably more attractive investments than Richard Branson's space tourism company, but as they are not publicly traded, us retail investors can't get a piece of the action. Boeing (NYSE:BA) has a slight exposure to space, but it's a drop in the pool of its primary operations. The electric vehicle industry paints a similar picture. Almost all of the big car companies are investing in and producing electric cars, including Ford (NYSE:F) and General Motors (NYSE:GM), but the only 'pure play' is Tesla -- I realize NIO (NYSE:NIO) and Nikola (NASDAQ: NKLA) are also options but the level of risk involved in such investments discount them from this argument.

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This short case study of the benefits of being the only option brings me smoothly on to the crux of this piece, DraftKings (NASDAQ:DKNG) going public last week. 

DraftKings going public

Draftkings' began its life as a public company through a merger with SBTech and Diamond Eagle Acquisition back in April. The merger allowed the company to go public without an IPO or direct listing. For those who are unaware of the business, it is a betting company that provides daily fantasy sports and an accompanying sportsbook. The legalization of sports betting on a federal level in the U.S. has led to a service like DraftKings growing in popularity and there was plenty of anticipation of its debut as a public company.

The timing for DraftKings entry into the public market is far from ideal, but the company has used it as an opportunity to showcase its adaptability and the stock has reacted well, with a 10% bump on its first day openly traded on the markets and is up a further 260% as of July 24. The NFL draft saw record betting volume, as well as a big increase in popularity for esports and alternative sports like table tennis. The increased interest in these events "shows that there's pent-up demand", according to DraftKings CEO Jason Robins. As supply returns to sate this demand, we can only see the company's user base growing. There is also the argument that with the potential for a return to professional sports in empty venues for a time, a service like DraftKings could benefit from sports fans watching from home looking to recreate the intensity of attending the games.

Beware of the Hype

Similar to Beyond Meat, Tesla, and Virgin Galactic, DraftKings is the only 'pure play' in the market for the nascent daily fantasy sports betting for many U.S. investors. This, coupled with its online sportsbook, puts it at the helm of an industry that is about to see a huge influx of users as more and more states begin to allow online sports betting. With its primary competition coming from UK betting companies like Flutter Entertainment (LON:FLTR), owner of DraftKings competitor FanDuel, and William Hill (LON:WMH), companies not available from many U.S. brokers, investors who see online gambling becoming a big industry in the U.S. will flock to DraftKings.  

What those three companies shared was an innate ability to capture the public's attention and inspire levels of FOMO investing we haven't seen before. I think the momentum behind DraftKings can lead to a similar situation. People buying stocks in these companies, simply because they were going up, led to sky-high valuations and untenable growth which was never going to be sustainable. I always use my group chat as a litmus test; once individual stocks begin to get mentioned amongst my non-investor friends, it's usually time to get out. Momentum investing will always be prevalent in the markets, but unfortunately for us retail investors, our professional counterparts are much more adept at it than us. Be careful not to get caught up in the hype of an individual company and getting caught holding the bag. For every investor that boasts a 3-bagger in a month, there is someone on the other end who was buying Beyond at $200 or Virgin at $40. Be careful you don't get caught in the same trap with DraftKings.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold positions in companies mentioned above. Read our full disclosure policy here.