Description

Company Description

GAN provides software for online casino gaming.  Its GameSTACK platform is designed to help its customers rapidly launch and scale their iGaming and online sportsbook operations. Their iGaming offerings support both social, as well as real money online casino gaming for deployment in regulated markets. While simulated iGaming and real money iGaming are both revenue centers for our customers, real money iGaming accounted for 81% of our revenues in 2019. GameSTACK forms the technical hub of their customers online gaming presence. The platform provides the foundational technology and back-office tools necessary for a successful consumer experience, including player account activation, payment services, geolocation, marketing, loyalty management and real-time analytics and reporting. GameSTACK further relies on a flexible integration services layer in order to integrate easily with other essential third-party systems such as casino management systems and sports betting engines.

Investment Thesis

Despite having the backdrop of positive business tailwinds, GAN is overhyped with a lot of inaccurate information which has led to an undeserving high multiple, which does not match its business outlook:

●   GAN’s revenues are leveraged to iGaming not Sports Betting

-    Only 10% of GAN’s revenues in 2019 were related to Sports Betting

-    While Fanduel is Gan’s largest customer, GAN primarily participates in their iGaming platform.  Revenues tied to Sports Gaming are small and will likely dwindle in the future (discussed below)

-    Morgan Stanley expects Sports Betting to grow at a 45-50% CAGR through 2025 and iGaming to grow at a more moderate 18-20% over the similar time period

-    Many of GAN’s touts tie their success to the trading of Draftkings (“DKNG”).  Much like Fanduel, DKNG success over the next few years will be tied to Sport Betting versus iGaming.  Therefore, trying to link GAN’s trading multiples to DKNG is erroneous

-    States have been more receptive to Sports Betting legislation than to iGaming legislation

●   Lobbying efforts by the major Sports Leagues have helped push through sports betting legislation, while these leagues have no interest in iGaming

●   Sports Betting is 100% new revenue for the States, it is unclear as of yet, how much iGaming revenue will be new versus replacement revenue for land based casinos

●   19 States have already legalized sports betting and 3 more are pending launch

●   Only 5 states have legalized online casino (non-poker)

●   Morgan Stanley assumes that fewer than 11 states will legalize iGaming in the US versus 38 for Sports Betting

●   Fanduel Sports Betting:  Fanduel is GAN’s largest client and only Sports Betting client

-    Fanduel is rolling out its own Digital Wallet for Sports Gaming in West Virginia and Colorado

-    Would expect that after contract is finished, Fanduel will migrate all of the GAN Sports Betting business to their own platform

-    This should really take away virtually all of GAN’s Sports Betting Business

●   Fanduel, their biggest iGaming client is losing market share and will grow slower than the overall market

-    Fanduel and Draftkings have done great jobs in rolling out their product early into NJ and Pennsylvania and have been able to capture outsized market share in both Sports Betting and iGaming

-    Fanduel & Draftkings traditional user base of fantasy sports is synergistic with “Sports Betting”, as it is a very similar product

-    Traditional Casino’s have been late to the “sports betting” game and have thus given up a tremendous amount of market share, without much prospect of gaining it back

●   PENN had to acquire Barstool, to get a large sports betting clientele

●   Most traditional casinos never had sports books and therefore do not have a strong customer database

-    iGaming, however, is a product extension of the land based casino’s and traditional casinos have been able to gain market share, despite an early lead by the online only

●   In fact, Fanduel has seen its iGaming market share in Pennsylvania drop steadily each month as the market grows.  In May, Pennsylvania (non-Poker) iGaming revenue was up 36% over April, while Fanduel’s revenues were up only 1%

●   Many operators, most notably MGM, have not even launched yet in Pennsylvania, as many Land Based Casino’s have been slow in getting their products ready.  PENN has not rolled out their “Barstools” casino, which will most likely take customers directly from Fanduel & Draftkings

●   Fanduel will still have a robust platform – but it is doubtful that their growth will be inline with the market growth

●   Hard to win new significant clients

-    One of the really good things about GAN is that operators do not want to change their Player Account Management (PAM) software.  While this is a selling point in how GAN should be able to retain most business, it makes it difficult to obtain new clients

-    Most of the US iGaming market is spoken for:

●   MGM has partnered with GVC and using their technology

●   Caesars uses Scientific Games & Eldorado has a partnership with William Hill and GameSys (Tropicana in NJ) – unclear about their plans in the future, but ERI is calling the shots here

·         This is looking more and more like a bit of a mess, with many technology providers (SGMS, Gamesys) and partnerships (Stars Group, William Hill).  The future of the combined companies online presence will most likely be resolved after the merger is completed.  Ultimately, I would expect for ERI to bring the much technology in house

·         On a recent call with Suntrust, SGMS said that they do not know of losing any client in iGaming, so it is doubtful that the “Tier-1” win is CZR/ERI

●   Draftkings uses SBTech, which it owns

●   PENN uses WhiteHat and Kambi.  PENN has the option to buy WhiteHat

●   BYD has a partnership with Fanduel (who will be running Boyd’s online gaming for the next few years), but BYD does not use GAN and from my conversations with management has no interest in using GAN

●   Golden Nugget just moved from SBTech to Scientific Games – Not a shock that Golden Nugget moved because SBTech is now owned by their competitor Draftkings

●   Rivers – Uses Rush Street Platform, which is owned by the same owners of Rivers.

●   Churchill Downs (Betamerica) uses SBTech, and is most likely the “Tier 1” client that GAN has spoken about.  Very likely that Churchill Downs changes from SBTech now that it is owned by Draftkings.  Interestingly, Churchill owns 50% of the Rivers Casino in Illinois, which uses Rush Street.  Perhaps they don’t want to use the Rush Street platform, as like SBTech, it is owned by a competitor

●   Pokerstars – Uses their own internal platform.  Both Fanduel & Pokerstars are owned by Flutter.  It would not surprise me if eventually, Flutter looks to move both onto one platform, which would most likely be their own

-    Most client wins will be new niche like Jack, Parx, Cordish and Indian Casinos – These brands should do fine in the states where they have a presence, but are unlikely to grow nationwide.

●   Many of these smaller clients will struggle to attract any market share.  Unlike the land casino’s where their location is a built in monopoly, online success requires major marketing dollars to compete with the large operators, something that the small niche players do not posses

●   Industry very competitive and technology commoditized – rates will be going lower

-    PENN views the platform software business to be a “commodity”.  They chose WhiteHat for their PAM because it came along with options to buy the Company.  They wanted to be able to have total control over their Player Account Management.

●   Player account management system, in where highly sensitive customer and player activity data is stored and processed

●   Having total control over this data, is seen as vital to large Casino Operators like PENN, which is why many of the abovementioned online operators own their PAM

●   This trend will make it more difficult for GAN to secure new business, and perhaps cause them to lose business

-    Additionally, there are many companies that provide this technology.  Thus far, it seems that the technology is indistinguishable.  Companies that provide iGaming  of software include

●   Scientific Games

●   IGT

●   GVC

●   SBTech

●   Stars Group

●   Gaming Innovations Group (GiG)

●   Rush Street

●   Dragonfish (888)

●   Playtech

●   Bet365

●   Gamesys

●   Pala Interactive

●   Kambi 

●   William Hill – Sports Betting Engine

●   Amelco – Sports Betting Engine only

-    Unlike the UK, the US market was set up with operators paying a % of revenue for their technology.  For operators that do not own their own technology, this will become a margin headwind.  Considering all of the competition in the space, I believe that pricing will eventually come down.  An operator that owns their technology will have greater flexibility for “customer acquisition expense” and marketing without having to sacrifice margin

●   Losing clients

-    As mentioned above, Fanduel is using their internal PAM for new sportsbook launches in West Virginia and Colorado.  Most people expect that Fanduel will launch most of their states with their internal PAM and ultimately migrate away from GAN in NJ & Pennsylvania

-    GAN’s second largest customer in 2019 was Winstar (19.8% of revenue).  75% of this revenue was associated with Winstar’s online casino in the UK.  On March 30, 2020 GAN entered into a “cooperation exit” agreement with Winstar, where GAN will take over the online casino

●   UK regulatory environment is tenuous, with the prospect of increased regulation around maximum bets, loss limits and increased taxes making it difficult to run a profitable iGaming site

●   Growth rate does not justify valuation. I would expect GAN to grow at a 15% CAGR over the next 5 years, which is certainly nice, but does not justify its valuation.  Even in a “Blue Sky” scenario, I don’t see how GAN can grow faster than 20%

-    In 2025, the expectations are for the iGaming market in the US to be $3.5-$4 Billion in Total Revenues

-    Assuming that GAN operators were able to obtain 35% of the total US iGaming market in 2025 (certainly a tall order considering the competition and considering that don’t have that share in Pennsylvania or NJ) that would imply $70 million of Revenues for GAN in 2025.  If Sports Betting and Simulated Gaming added another $20 million of revenues (very generous considering its position in sports betting and limited revenues associated with simgaming), a total of $90 million in Revenues in 2025, would imply a 19.5% CAGR through 2025

●   To sum up:

-    GAN is leveraged to iGaming (18-20% CAGR) and not Sports Betting (45-50% growth)

-    10% of revenues associated with Fanduel Sports Betting will not be growing anywhere close to the market and will most likely decline after contract expires

-    Expect their clients to grow slower than the overall iGaming market as they either lose share to traditional casinos or do not have the coverage depth to roll out in new states

-    Due to competitive pressures, would expect the revenue take (as a % of operators revenues) by technology to decline with each new contract

-    Their growth rate does not support their valuation

Valuation

●   Many sell-side analysts and stock touts have been pointing to Draftkings and Flutter as comps.  As I have stated, these are terrible comp since Draftkings & Flutter are leveraged to the high growing Sports Betting market (45-50% CAGR over the next 5 years).

●   They are also comparing GAN to SaaS companies, many of which are also bad comparisons

-    The high flying SaaS companies have enterprise customers, that are on subscription plans and have 75%+ gross margins and don’t need legislation for their clients to grow 20% a year

-    GAN has medium sized companies, with 60% gross margins and serving a market that is growing 18-20% a year, but whose clients should be growing at slower rates

●   While the 34 companies in the BETZ ETF have a wide range of multiples,

-    GAN has the highest 2021 EBITDA multiple (48x) and the third highest 2021 Revenue multiple (13.6x) even though their 2021 sales growth is 15th

-    The average company in the ETF has an EBITDA multiple of 12.2x and a  Revenue multiple of 4.3x

●   Probably the best comp out there is Kambi Group, which trades in Sweden.  Kambi, has similar software and is leverage to the PENN gaming and their possible success with Barstool.  Theoretically, Kambi should be growing faster than GAN over the long term as they are leveraged to sports betting (and in fact are expected to have much faster growth in 2021), but they don’t trade here in the US

-    Kambi Trades at 4.5x 2021 Revenue and 13x 2021 EBITDA (remarkably close to the average of the BETZ etf)

-    Assuming that GAN should trade at a 50% premium to Kambi because they trade in the US, would equal 7x 2021 Revenues and 19x 2021 EBITDA or $11-$14 a share

●   Prior to its uplisting on the Nasdaq in May, GAN has traded for years in Europe

-    GAN had a trading history of trading near 1-3x forward revenue

-    Just prior to its uplisting (2 months ago), this moved to 6x 2020 revenues

-    Now GAN is trading at 18x 2020 revenues

Why Does This Opportunity Exist?

●   Highly promotional company

-    Management makes announcements to pump the stock.  On the last conference call they said “we signed a term sheet with a Tier 1 client”, where most companies make an announcement when they actually have something to say

●   This was an excuse to have investors “look away” from the fact that despite all the positives in online gaming and betting, their revenues and ebtida decreased year over year

-    Every month they issue a press release announcing the monthly iGaming & Sports Betting numbers in Pennsylvania and New Jersey.  A casual reader may then think that Pennsylvania iGaming revenue grew 30% sequentially in May which means that GAN’s revenues grew that much. 

●   Robinhood & Dave Portnoy

-    Dave Portnoy of Barstool, who now is known as Davey Day Trader, has a very large following and has been touting the GAN stock and it has become a favorite among RobinHood accounts.  While this certainly is a nice base to have in the short term, many of these holders are momentum and trend followers

●   BETZ ETF

-    GAN has the highest weighting in this new ETF which is focused on online gaming with the 11th smallest market cap, giving it a disproportionate amount investment from the ETF

●   IPO – right place right time

-    Their up-listing was timed perfectly.  It hit when interest in online gambling started soaring and besides draftkings, was the only pure play traded in the US.  Additionally, the timing coincided with the “rise of the day traders” and the start of the BETZ etf (June 4th).  All these positive factors hit the market at once.  There perfect storm

Risks

●   A large operator like Caesars / ERI decides to buy GAN to bring the technology in house

-         Seems unlikely that they would go after GAN as the price is too high

●   The “Tier 1” customer that the company has been touting, is indeed Caesars / ERI.  They are a premier operator that should eventually do very well in online gaming.  If they sign a multi year deal with the current economics, it would certainly be a great source of revenues for the next few years

-         However, even getting them would not justify the current valuation.  If CZR/ERI was able to obtain 20% market share of online casino by 2025 (possible, but unlikely considering where they are right now) that would equal approximately $700 million of online revenues.  If GAN was able to strike a deal at the usual 4-5% of revenues, (again possible, but unlikely considering the competitive environment and ERI’s hyper focus on margins)  that would equal $35 million in revenues for GAN.  At a 30% EBITDA margin, would equal $10.5 million of EBITDA.  Given the generous multiple of 19x EBITDA, in 2025, would equal $200 million of additional value to GAN  or $7 a share.  Discounted back 4 years at a generous 8% discount rate would equal $5 a share, which added to my valuation would still be significantly lower than where its trading today

●   iGaming legislation in states moves much quicker than current expectations, accelerating near term growth

Catalyst

●   Announcement of Tier 1 client

●   Investors realizing that GAN is a iGaming play and not a sports betting play

●   The eventual demise of the RobinHood day traders

●   Fanduel announcements regarding who their technology partners are in the new launches

●   Monthly iGaming numbers where Fanduel continues to underperform the market