The juggernaut of public listings for online betting groups in the United States gathered yet more pace this month as Genius Sports became the latest igaming specialist to announce that it was going public via a merger with the special acquisition company (SPAC) dMY II Technology Group.
dMY is the fund set up by Harry You and Nicolo de Masi that merged with Rush Street Interactive through its dMY l fund and took the company onto the public markets with a $1.8bn valuation.
Genius Sports is one of the main suppliers of odds and data feeds to online betting operators worldwide. The merger with dMY II values the company at $1.5bn and the deal is expected to be completed by the end of the first quarter of 2021.
As I wrote back in August, the reasons for this wave of listings are clear. A promising new sector that should continue to grow as more states regulate, it provides opportunities for investors looking to place their funds in up-and-coming verticals. However, it is also worth looking at the detail behind the headlines.
For Genius Sports, its presentation shows it had revenues of $116m in 2019 and posted a $9m loss during the period. Its forecasts for 2020 are $145m in revenues and adjusted EBITDA of $14m. To go from a $9m loss to $14m in EBITDA in 12 months is a major turnaround by anybody’s reckoning.
Punchy valuation
In terms of revenue forecasts, Genius says it will generate $190m in 2021 and $238m in 2022 and EBITDA of $35m and $68m, respectively. According to the group, EBITDA will more than double in 2021 and nearly double once again in 2022.
Looking at the breakdown of the 2019 figures, it shows operating losses of nearly £40m, with £23.5m of that amount written off as debt and amortization. For a group like Genius, the only outlay that could incur such a write-off is the acquisition of sports data rights that the group was unable to monetize.
This is not exclusive to Genius. All its main competitors — Sportradar, IMG and Perform — face this problem, especially as there are no exclusivity deals requiring operators to use official league data provided by those groups.
In other words, those suppliers might pay a premium to offer official NBA, Premier League or ATP data to operators, but in the same process will undercut one another by selling their own non-official data covering those sports. Again, this is not to single out Genius Sports. These issues are specific to these B2B companies, but it does provide some idea of the context in which they operate.
For the private equity group APAX Partners that owns Genius Sports, there is no question that the timing of the listing is right, although a $1.5bn valuation could be on the ‘punchy’ side.
CDC Gaming asked Genius Sports for comment, but had not received a reply at the time of writing.
Getting the revenue trajectory right
Looking at igaming overall, Chad Beynon, Managing Director, Gaming, at Macquarie bank in the U.S., says the market stateside could hit $30bn in revenues by 2030, “but to reach that forecast, we need legislation. With the economy badly hit by the pandemic and states functioning under major budget deficits, this should lead to more regulation.”
In terms of early data points, Beynon says, “September numbers were below expectations, but this was due to intense competition, leading operators to give away huge sign-up bonuses and free bets. The key for investors will be whether brands can generate the returns and maintain the revenue trajectory they’ve set out, especially amid all the marketing spend for customer acquisition.
“If sportsbooks acquire good market share and dial back on marketing spend, and revenues are moving in the right direction, investors will be comfortable. But if they’re spending major amounts and not getting market share and revenues, then it becomes worrying, which is why some share offerings got pulled back recently.”
Lloyd Danzig, founder of SharpAlpha Advisors, says, “These stocks are benefiting from the ongoing surge in retail trading, significant media coverage, the ‘stay-at-home trade’, and a perception of scarcity, as well as a bona fide growth opportunity. Companies trade on future earnings; expectations for the industry are as high as ever. Current valuations suggest that investors believe sports betting and igaming will grow as a share of discretionary spending and that market leaders will leverage their role as operators to capture share in the broader sports entertainment ecosystem. (But) over the short- and even medium-term, almost no price movement can be confidently ruled out.”
Technology is the other key factor in driving the recent surge in M&A and listings. Beynon says, “In the U.S., brands are realizing they want to own their tech, so that they can keep more of the revenues for themselves. This is what drove the DraftKings-SBTech merger and now the Caesars-William Hill deal. We’ll continue to see these kinds of deals, because outsourcing technology hits profit margins and restricts operators’ ability to differentiate on both brand and product.”
Danzig adds, “This Caesars-William Hill merger will unquestionably supercharge Caesars’ acceleration into the sports betting space, especially in relation to mobile. However, as innovative brands acquire, retain, and engage customers in new ways, a compelling and differentiated product offering will be critical to securing market share.”
When it comes to the nationwide market, there is hope that California and New York will regulate igaming and provide the scale necessary so that it can realise its potential.
Total Addressable Market
“The fragmented regulatory landscape is detrimental to both businesses and consumers and the uncertainty surrounding legislation further inhibits innovation and investment. The legalization of online sports betting, especially in major markets like California and New York, will increase the size of the Total Addressable Market and remove friction that may be stifling growth in undetected ways,” says Danzig.
Sports betting gets all the media coverage and the partnerships that operators have struck up with major networks like ESPN, ABC or NBC indicate the scale and reach of the vertical. Looking ahead, Beynon says recent surveys have shown that 30% of Americans want to use their discretionary spend to gamble.
“But the product needs to improve still: in-play and social media features bringing sports betting into the mainstream as a socially acceptable activity, which is what Barstool Sportsbook is doing with its output.
“With the NFL concluding in early 2021, March Madness will be the next main sports event and the product will have improved by then. I also think there will be more M&A focused around technology. After PASPA, everybody was looking for a platform to partner with, and now, some are looking to acquire the right tech partner. Finally, revenues need to move in the right direction. Roughly 3% of the population is signed up to accounts in regulated states. We would like to see that move closer to 10%.”
