Description

GAMB is a profitable, growing, under-appreciated $350 million market cap performance marketing company that exclusively targets the regulated online gambling sector.  Founded in 2006 by CEO Charles Gillespie to focus on opportunities in Ireland and the United Kingdom, the company is now well-positioned to take advantage of the burgeoning North American market as state and country approvals come to fruition.  The stock has been range-bound since its July 2021 IPO at $8.00.  A secondary in June of 2023 by long-time investor Edison Partners at $9.25 improved liquidity and reduced shareholder concentration.  Trading at a modest 8x 2024 consensus EBITDA of $43m, we think the story has a perception problem more than anything else.  Investors have been burned by lead generation companies in less dynamic and lower growth sectors, and GAMB gets a bad rap for being openly—albeit successfully—acquisitive.  We believe the company is ideally positioned to ride the North American online gambling wave, and the experienced management team has shown themselves to be prudent allocators of capital and effective operators.  Fundamentals should remain solid for this 35%+ EBITDA margin business as gaming approvals spread and new markets come online.

Business Model

GAMB’s primary business is running gambling-related content sites that generate qualified leads for online casinos and sportsbooks.  Their catalog includes 50 sites in more than 15 national markets, featuring headline brands such as Gambling.com, Casinos.com, Bookies.com, Bonusfinder, and Rotowire.  Users visit the respective sites for gambling related strategy content, deals, and coupons.  GAMB earns a bounty when customers follow links on websites and become “new depositing customers” (NDC’s) with sponsoring vendors.  The bounties take 3 primary forms, 1) Cost Per Acquisition (CPA) which is a 1-time payment for NDC’s, 2) Revenue Share wherein GAMB receives a share of the net gaming revenue generated by a NDC, and 3) Hybrid which mixes as aspects of both.  Note the company has never historically disclosed the relative size of each bucket, but we estimate ~55% are CPA, 30% are Hybrid, and 15% are Rev Share.    GAMB also recently launched media partnerships with Gannett and McClatchey, whereby the online papers run GAMB content with embedded links and share in the resulting revenue.

Stock Opportunity

We like the setup here with the stock trading below $10.  Shares fell more than 20% on November 16 following a poorly received earnings report.  We think the sudden price drop was ephemeral and misguided.  Expectations were exceedingly high heading into Q3 after the stock rose 40%+ between July and August following a stellar June Q2 blowout report which saw the company deliver $26m in revenue against consensus estimates of only $21.8m.  Management cautioned at the time about the 1-time nature of certain Q2 revenue items, but traders were still disappointed when they only beat Q3 revenue expectations of $22.2m by $1.3m.  “Up chart” momentum turned from a tailwind into a headwind.  On the business side, a handful of fundamental nits added fuel to the fire.  Faster than expected growth from the company’s new and burgeoning media partnership business drove blended gross margins down from 97% to 91%, and the company messaged that this business mix change would drive marginally higher revenue in 2024 with slightly lower EBITDA.  Blending all the commentary, consensus FY24 EBITDA estimates—our valuation north star—fell from $45m to $43.2m after the report, a drop of only 4%.  Shares are now 28% lower since the earnings event, which feels overdone given our bullishness on medium term prospects and a margin “reset” that we contend was less significant than expressed by the pullback in the stock.

Market Opportunity

GAMB counts more than 200 companies in North America, Europe, Australia, and New Zealand as customers. The top 10 customers make up around 50% of revenue, and include household names such as bet365, DraftKings, FanDuel, ESPNBet, and BetMGM, among others.  Aside from the flagship brands mentioned above they manage a host of state-specific sites such as BetMassachusetts, TopNjCasinos, EmpireStakes, etc.  North America is the most dynamic market opportunity ahead and remains remarkably under-penetrated with 21 states still lacking any form of legalized casino or sportsbook.  Importantly, we expect most states to eventually go online as governments search for additional forms of revenue.  This seemingly inevitable eventuality is the most obvious and compelling tailwind in the GAMB long thesis.  States will legalize online gambling.  Customers will need player leads.  GAMB will leverage their market presence.

Source: November 2023 company presentation

Online gambling’s share of overall gross gaming revenue (i.e. inclusive of in-person gaming) in the United States has plenty of room to grow.  Using 2019 industry numbers, in Europe online share has grown to 33%, and in the United Kingdom it’s even higher at 54%.  In the U.S. that number is less than 1%.  Company cited 3^rd party estimates suggest the global online gaming market will grow by +12% through 2028, with the U.S. market growing materially faster at +28%.  At a 12-month revenue run rate of just less than $100 million, it’s hard not to get excited about GAMB’s growth prospects if they merely ride the wave in front of them.

Competitive Advantage

GAMB has been in business for 17 years.  Over time they’ve consolidated and created a modern tech stack that allows them to quickly and effectively layer on new affiliate sites.  We’re usually skeptical when companies tout “back-end system superiority,” but our due diligence calls with former employees have led us to believe that GAMB has indeed invested significant time and money.  This includes a proprietary content management system to syndicate articles and reviews across sites (Genesis), an advertising platform to manage placement and impressions (Elements), and a SEO-focused publishing platform (Origins). As a whole the tech-stack enables GAMB to roll out new sites and fold-in acquired properties efficiently and in short order.

Financial Outlook

As mentioned previously, GAMB’s stock is down more than 40% from August highs.  Investors were troubled by the company’s commentary about forward gross and EBITDA margins, but we think this is a case of fast money selling nuance and missing the bigger picture.  The company launched a series of media partnerships in which online sites will run GAMB content and share revenue.  We estimate gross margins of 50% on this revenue stream and expect it to contribute less than 10% of revenue in 2024.  Sell side analysts underestimated the growth of the partnership line and had modeled very little contribution in their 2024 revenue estimates.  As a result, soft management guidance on the call moved 2024 EBITDA margins down from 38% to 35%.  Today expectations stand at $43m in 2024 EBITDA on ~$121m in revenue.  Even if media partnerships grow as a portion of revenue, we think topline has plenty of room to run either organically or through acquisitions.  Revenues of $175m (20% CAGR) in 2026 at a realistic EBITDA margin of 35% could produce $60m+ in EBITDA.  Today the stock trades at less than 6x that number.

Competition

Better Collective (Better) (BETCO-SE) and Catena Media PLC (Catena) (CTM-SE) are relevant public competitors in the online gambling space.  Catena has fallen on very hard times (see the stock chart) and the business appears to be in disrepair.  Better is actually a 5% owner of the equity and we think a merger would have already happened had Better not been busy consolidating Playmaker Capital and managing its balance sheet.  Many of the players in the sector run a similar model to GAMB with a vast array of affiliate sites and content.  The revenue makeup at Better Collective is far more skewed towards revenue sharing arrangements, which exposes them to the risk that operators don’t do well from new depositing customers.  Candidly we prefer the GAMB cost per action model and are skeptical of the temptation to label rev share arrangements as “predictable.”  Regardless we think GAMB is well suited to compete against this group, with a leaner ship, cleaner balance sheet, and better track record of capital allocation.

Management

CEO/Founder Charles Gillespie (14% ownership) has done an excellent job building GAMB over the last 17 years.  We sense he runs the business with a private equity type orientation, as if he owned it whole and every dollar deployed were his own.  Elias Mark (CFO) has been onboard since 2016.  If we were to level any criticism of the team it would be that they are still learning how to manage and communicate business changes and expectations.  We’re somewhat optimistic that the recent gaffe around 2024 margins proved instructive, and the stock/fundamental disconnect that currently persists because of expectations mismanagement will close and produce attractive returns. 

Target

At $9.33 the stock is trading below 8x 2024 EBITDA of $43m.  We think the multiple could easily expand to 10x with a few quarters of stability and on-target results.  The stock can trade well above $13.50 (+45%) on conservative 2025 EBITDA of $50m at that multiple.  At 12x the stock could hit $16 (+70%).

Risks

• Publishing model mix shift leads to worse than feared EBITDA margin compression
• Mix shift towards revenue share arrangements defers topline growth
• Macro headwinds derail the momentum of online gaming in North America

Catalyst

• FY23 earnings report (early March) that communicates EBITDA margin stability against already-tempered expectations
• Accretive acquisitions and/or smaller deals that would calm equity holder fears of dilution
• Legalized gambling in new states and/or countries