Description

Genius Sports is one of two companies that control the global data for sports betting.  The company has exclusive relationships for global data with the NFL, the English Premier League (EPL), and the NCAA.  Its main competitor is Sportradar (SRAD).  The two companies operate as a duopoly for global sports betting data. 

The Brazilian Senate today passed a bill legalizing online sports betting for its 210 million citizens.  As a reference, the US currently has approximately 180 million citizens living in states with legalized online sports betting (includes Florida).  The Brazilian law will now be sent back to the Brazilian house for “conference”.  The Brazilian house overwhelmingly approved the bill in September (70%+ support) and it will be signed into law by December 21, 2023 by the Brazilian president who is a huge supporter as it is his signature bill to close a budget deficit.  I anticipate that the new regulations will be in place by July 1^st, 2024 which is when Genius will begin booking revenue. 

There are 235 million shares outstanding and the company had $116.3 million in cash and restricted cash as of Q3 2023.  Enterprise value at $5.40 per share is approximately $1.15 billion.  Street EBITDA estimates for 2023 are $53 million and for 2024 $73 million.  Genius currently trades at 21.3x 2023 EBITDA estimates.

The thesis is that the company is a duopoly in sports betting technology and data that takes a growing slice of the secular growth in global and legalized online sports betting and is now free cash flow positive.  Estimates for 2024 are absurdly low.  For 2024, I estimate that the company will do approximately $100 million in EBITDA (vs street at $73 million).  This estimate excludes the impact of a fully legalized Florida ($13 million) which is now legal and six months of a legalized Brazil ($17.5 million).  If Brazil and Florida play out as expected, the company can do upwards of $130 million in 2024 EBITDA vs. the street at $73 million.  Regardless, my base case of $100 million in 2024 EBITDA assumes 88% EBITDA growth for 2024.  With that growth profile, the stock is currently trading at 11.5x my 2024 EBITDA estimate. 

“Fast growing” consumer data service peers like PINS and DASH trade at 20-23x EBITDA with three-year CAGR’s of approximately 35%.  Genius is a superior business with 1.5x the three-year CAGR growth rate that trades at half the multiple!  Other database businesses like Costar trade at 50x EBITDA multiples.  Assuming a multiple inline with the lower quality data services businesses of 25x yields a near-term price target of $11+.  With a half year of Brazil and a full year of Florida in 2024, the target is $14+.

The company has a history of setting extremely low guidance with the street and then leapfrogging estimates as the year progresses.  For example, initial guidance for 2023 EBITDA in March 2023 was set by the company at $41 million.  With three quarters of 2023 in the bag, the company will do approximately $53 million in 2023 EBITDA.

The overhang on the stock for 2022 and part of 2023 was that the company was a SPAC.  At the time of the original SPAC transaction, the stock was in the $15-$20 range and was trading at 12x forward revenues.  Today it trades at 2.75x 2023 revenues.  The other overhangs were that the company overpaid for its NFL rights package, the company was burning cash, and the company was spending heavily on its AI tech portfolio.

In my view, they did overpay for NFL rights!  However, they used half stock that was overvalued at 12x revenue (NFL owns approximately 18 million shares) and currently pay approximately $60 million in cash per year for the data.  However, that investment bought them a greater than 50% market share in the exploding US sports gambling data market as the NFL is king.  From here, their superior tech stack that will enable in play sports betting on complex sports like football will provide years of growth with their Betvision streaming application.  For reference, Genius earns approximately 1.75% of the hold for pre match bets.  For in play bets, Genius earns 5% of the hold.  Currently, 25% of bets on the NFL are in play (vs. 80% for European soccer).  Fanatics announced that with Genius’ Betvision streaming product in place in September, in play bets were 50% of the handle for those who streamed.  Essentially, with in play betting, Genius earns 3x the revenue stream at the same fixed cost.

In Q3 2023, the company generated positive free cash flow for the first time as a public company.  It will remain free cash flow positive from here.

The AI surge is over and should be coming down meaningfully in the next couple of years as their technology is now capable of gathering 2,000 datapoints per player in less than 200 milliseconds on the field for football, soccer, and basketball (this provides unlimited data for future betting, media, and augmentation applications).  I estimate that they have a five-year head start on Sportradar with their technology.  None of my estimates assume revenues or EBITDA for applications that could come from this unlimited data potential in sports betting, media, or broadcast augmentation.

To give more color on 2024 estimates, I will bridge the gap between current year’s EBITDA of $53 million and my expectation of $100 million to $128 million in 2024 EBITDA.  To do that, I want to provide some context on the breakdown in revenue by segment.  The company will do approximately $415 million in revenue in 2023.  The Betting Technology, Content, and Services segment will do approximately $270 million in revenue.  The Media Technology, Content and Services segment will do approximately $95 million in revenue.  The Sports Technology and Services segment will do approximately $52 million in revenue. 

I estimate that in the Betting segment, approximately $175 million of the revenues come from Europe and approximately $65 million comes from the United States.  The remainder comes from Latin America, Canada, etc.

Historically, in Europe, the company has raised its prices by 10%-15% annually for its data.  In 2023, the price increase was greater than 20%.  By reference, the European data business was approximately $80 million in 2019.  European pricing is different than in the U.S. as it is not volume or results driven but is an annual fixed cost contract that resets annually.  As such, I estimate that European pricing will rise 12.5% in 2024 adding approximately $22 million in revenue.

The U.S. market has seen astonishing same store sales growth in states that have been legal since 2019.  In the last four weeks in New York which is in its third year of legalization in November, handle is up 33% YOY.  Draft Kings has shown in many presentation the growth rates in same state handle by vintage.  To be conservative, I assume a 10% increase in SSS for 2024 in the U.S which adds $6.5 million to revenue.

In 2024 North Carolina comes online and additional states that were legal for a stub year anniversary their legalization.  Assuming NC launch on April 1^st and including stub year growth for states like Kentucky, New Hampshire, Maine, and Massachusetts, I arrive at an additional $6.5 million in baked in revenue growth.

Also in the U.S., Genius earns 3x the revenue for the adoption of in play bets as a percentage of hold.  In their model, they assumed a 5% increase in in play penetration for the year.  This seems conservative as well given that Betvision is launched and is currently in operation at all sportsbooks except Draft Kings (Draft Kings has indicated that it is coming as well but hasn’t committed to when).  I estimate that increased in play betting will add $7.5 million in 2024 revenue in the U.S.

Now, the big enchilada is U.S. pricing.  When Genius launched its NFL product in the U.S. it agreed to three-year deals with the operators.  All of those deals expire in mid-2024.  I estimate that of the $65 million in revenue for the U.S. data segment, $35 million comes from the NFL.  For reference, a company like Draft Kings with a 33% share of the U.S. market pays approximately $21.5 million annually for all the data it purchases from Genius.  Of that, approximately $11.5 million is just for Genius’ NFL data.  That is nothing compared to the $500 million in 2024 EBITDA that Draft Kings expects.  Genius purposefully chose to subsidize the NFL data in 2021 (revenue of $35 million in 2023 vs. cash cost of $60 million) to build share here.  It has worked.  However, the time has come to reprice those sweetheart deals and given how small they are in the overall operator cost structure and their exclusivity with the data.

What is reasonable?  I would argue that the company at a minimum is going to get NFL pricing inline with its cost structure for the data.  A $25 million annual increase for the 2024-2025 season is reasonable (note that for a company like Draft Kings, that increase would be approximately $8 million which is peanuts).  Given that 80% of the season’s revenues are earned in the regular season, that amounts to a $20 million increase in revenue for NFL pricing in 2024 and does not include price increases prices on the other $30 million in U.S. data revenue.

Finally, I anticipate that their Media segment will grow by $20 million (21% growth) next year .  The incremental margins there are 20% which will drop $4mm in EBITDA to the bottom line.

Outside of the Media business, the estimated revenue increases are for $62.5 million in revenue growth next year.  That is clearly not all at 100% margins but they have done a remarkable job at keeping cash costs flat in 2023.  I estimate that their data rights costs will increase $12 million next year and that the core business will see cost increases of $7.5 million.  As such, I arrive at $100 million in EBITDA for next year.  The business is predictable given the long term data contracts and prices go up as reliably as the sun rises in the east.  

Now, what is not in the numbers?  First, I have EXCLUDED Florida.  Florida gave an exclusive license to the Seminole tribe who launched statewide mobile betting last week.  There are two pending court cases that could throw a wrinkle into the launch, however.  First, there is a Florida Supreme Court challenge to the law.  The should be ruled upon no later than April 1, 2024.  Of note, DeSantis cut this deal with the Seminole tribe and five of the seven Supreme Court justices were appointed by DeSantis.  I do not see them throwing the law out, but anything is possible in a legal challenge.  If the Florida Supreme Court keeps the law intact, there is also a U.S. Supreme Court challenge that will then kick in (it is delayed pending Florida outcome).  If that kicks in, the U.S. Supreme Court won’t be in a position to hear the case until the end of 2024 and certainly will not rule on the case until early 2025.

 Therefore, my assumption is that Florida will be fully legal for all of 2024.  At $80 in hold per capita, a 1.75% charge for data services, and a 45% market share, Florida will provide an additional $13 million in revenue/EBITDA to Genius as there is no incremental cost to provision the state.  This $13 million is not in my estimates.

Even bigger is Brazil.  The Brazilian Senate passed the sports regulation bill today.  It will become law by the end of the month.  The law provides for a six-month period to set-up the regulatory body and enact the provisions of the law.  Therefore, the law should allow for legalized sports betting to begin by July 1, 2024.  If it slips, so be it, but the opportunity is massive and provides another year of “in the bag” growth for Genius, even if Florida slips out in 2025 with an adverse U.S. Supreme Court ruling. 

To size Brazil, I assume that given it is a developing country, the per capita hold will be approximately $25 (vs. $80-$85 in US).  Brazil has 210 million people which is larger than the current population in the U.S. living in legalized states.  I assume the same data charge of 1.75% of hold.  With a 45% share of the market, I anticipate there will be an incremental annual revenue lift to Genius of $41 million.  However, given the size of the market and some incremental data and staffing costs, I assume a year one contribution of $35 million in EBITDA to Genius.  If it lights up on July 1^st, 2024, that is an additional $17.5 million to Genius in 2024 with the full $35 million run rate being realized in 2025.  At current multiple of 21.3x, Brazil alone is worth an additional $3.12 per share to Genius when it goes live which will happen in 6-12 months!

In conclusion, street at $73 million in EBITDA for 2024.  Super easy path to $100 million in 2024 EBITDA with an option on an additional $30.5 million of which $13 million is Florida where it is now legal and live. Does not include additional venues for legalization in the U.S. or Asia nor does it include growth for the rest of their data and technology business outside of the U.S. and Europe.  Currently trades at 21.3x 2023 numbers.  I assume a slight increase in multiple to 25x given the acceleration of growth relative to the street from here.  Target of $11-$14.  Shave a dollar off if you prefer to keep constant multiple of 21.3x.

Catalyst

By December 21, 2023, Brazil will be fully signed into law. 

Flutter lists in the U.S. on 1/29/24 bringing more interest to sector.

Early March 2024, the company will guide 2024 EBITDA with Q4 earnings release.  My expectation is that they will guide EBITDA to approximately $85 million if there is no further clarity on Florida or Brazil that ups their conviction in those two venues.  If Florida clears the Florida Supreme Court before then, then they will have 100% certainty that Florida will be in the full year numbers and guidance will be adjusted to $95 million+.  If Brazil is passed and they have a clear line of site on a launch date, they will include Brazil in guidance.  However, if passed, they might indicate that 2024 numbers have no Brazil in them as they will not want to underwrite a hard launch date in their forward guidance.

From March 2024 to July 2024, there will be a variety of legislative processes in different U.S. states for legalization.  The lead contenders in this cycle include Georgia, Missouri, and Minnesota.  Outside chance South Carolina.  I can see another 15-20 million U.S. residents then legalized in late 2024 or early 2025.  There might also be a negotiated settlement in California that places the subject on the ballot in November 2024 if the tribes can back something.  That is a long shot.

June and July 2024 would expect to hear some scuttlebutt on U.S. contract renegotiations and pricing. 

NFL price increase show up in Q3 2024 numbers in the November print.

Monthly updates on hold/handle across the already legal states.