Description

RVLY is a microcap traded on a backwater Canadian exchange, with two analysts if that’s what you want to call them. Admittedly, this is more of a flyer investment and likely more appropriate for PA’s, but the team has been executing.

They have high engagement across gen z, and have shown to be able to live within their means as they beef up their user base. This team has been able to avoid any dilutive financing since its IPO roughly 2 years ago and should not be far off its harvesting stage.

Let me be clear here, this is not DKNG outspending its revenue base with big splashy advertisements on ESPN while insiders dump their shares on the open market. This is a savvy group of kids that are pruning prudent marketing opportunities while never selling a share.

“Bonusing is not the way to salvation in this industry.” – Salz

Management isn’t exactly forward with user data, churn, cac, LTV etc. That being said, they seem to be finding nontraditional ways of expanding its user base and in turn, Revenue / GM (influencers, esports partnerships, word of mouth, etc).

Last October was its first profitable month, and though it will likely face some up and down months with the seasonality of esports, the company is expanding its offerings (casino / igaming) on the back of its current licenses in Isle of Man, Ontario, and Australia.

The company today offers a platform for fans to engage in online betting and gaming on various esports events and competitions. With the 3 licenses that it has, it has also branched out into content creation (building games that serve their customers by mimicking video games rather than typical casino games) and has started to offer igaming for its fans. This should somewhat help to offset the seasonality of being a victim to the esports season (usually ends in November).

Rivalry owns its own tech stack and the growth is happening. Q4 should report soon, but the below were highlights from Q3:

• Betting handle was $70.3 million, up 203% year-over-year and 83% quarter-over-quarter.
• This year also saw the launch of our first-ever casino game during the quarter, which delivered immediate impact, contributing 30% of betting handle and 15% of revenue despite little to no marketing efforts.
• 82% of active customers in the quarter being under the age of 30 years old
• We have a variety of game and region-specific channels with hundreds of thousands of followers that tap into the passionate communities of esports and produce viral and localized content for them.

Month of October (seasonally strongest month of the year)

• We put up a single-month record betting handle of $37.2 million, a year-over year increase of 190% and nearly equaling all of Q2 alone. -- revenue was $4.5 million, a year-over-year increase of 501%, and gross profit was $2.1 million

The Company raised $22 mm in the middle of ’21 when it IPO’d, and has been able to manage its growth trajectory without any further dilution. In the last 2 years, they were able to turn $500k of quarterly GP into $1.5 mm of quarterly GP. In those 2 years, they burned most of that $20 mm, but there is pretty significant operating leverage in this business once it gets profitable. And they should be the beneficiary of a few positive tailwinds: i) overall esports growth ii) online gambling growth iii) expansion into new betting markets

We like management, and believe that if they ever make it to a real exchange and continue to be successful in avoiding dilution and crossing the bridge to profitability while still having a shot on goal of monthly double digit growth, it shouldn’t need too many months to fetch a real valuation.

The company has been narrowing its cash burn and at $3-$4 mm / q, it does need to start addressing its cash burn over the ensuing next few quarters. With an estimated opex of $5 mm/q and assumed 30% gross margin, we’d like to see Revenue potential of $70 mm/year.

Lets say they are able to achieve $15 mm out of the casino business and they can double their base business revenue (lets say October was the extreme at 5x yoy; a doubling of revenue may not be that far fetched).

Give them a year to do it, and I’m not sure why this shouldn’t be a 10X revenue business. That’s close to 10x the current market cap (EV sits sub 60 mm dependent on Q4 cash burn). If they fail, and have to fundraise, well then it takes a bit longer to do so. And even if they do have to do a small fundraise it is likely only a couple quarters of cash burn to bridge the gap. The TAM is wide open, and they clearly have a pretty decent foothold without even scratching the surface.

They are minnow in the at large gambling market which they point to 10% yoy growth; they point to the esports market growing at a 50% CAGR (Australian Gambling Statistics), Morgan Stanley, iGaming Business, Eilers & Krejcik Gaming). In a market where one wants to have both growth and earnings, we like the odds on this one being able to thread the needle of both.

Note fairly high risk / reward at these levels. But given Q4 should be released shortly that will either confirm or deny the thesis, we believe its opportune to have a bit of exposure at this stage.

Catalyst

Q4 results

Ability to thread the needle over the next few quarters w/out a fundraise