2023-11-03 16:09:25 ET
Summary
- Genius Sports operates globally, leveraging data-driven strategies and partnerships with over 400 sports organizations, including the NFL and English Premier League.
- The company offers real-time sports data collection, integration, and dissemination, as well as advanced technologies like big data and augmented reality.
- Despite optimistic revenue growth, GENI's path to profitability is uncertain, and the current valuation seems expensive, warranting a "hold" rating for the stock.
- My "hold" rating leans slightly bullish as GENI's substantial revenue growth, assuming a potential alignment to industry-average EBIT margins by 2025.
- For GENI's upcoming earnings report, I believe only a significant revenue beat, coupled with meeting expected profitability margins, would warrant a valuation reassessment.
Genius Sports Limited ( GENI ) has a global operational footprint, leveraging data-driven strategies, accentuated by its strategic affiliations with over 400 sports organizations, including industry giants like the NFL and the English Premier League. At the heart of GENI's offerings is a robust framework for real-time sports data collection, integration, and dissemination, enriched by cutting-edge technologies like big data and augmented reality. I believe these technologies significantly enhance user and betting engagements, fostering a global fellowship among sports organizations and aficionados. In my view, GENI's pivotal alliances, particularly the extended collaboration with the NFL and the renewed betting data pact with Football DataCo, epitomize its long-term dedication and foresight in an expanding sector. The trajectory of GENI's revenue growth is optimistic, yet the elusive profitability remains a concern. Even with a positive outlook on its EBIT margin, GENI, in my opinion, is presently overvalued. However, I infer that the firm's solid fundamentals and business dynamics offer a counterbalance to these valuation apprehensions, rendering a "hold" rating for GENI at these levels as a reasoned stance.
Business Overview
Genius Sports was established in London in 2016 and employs a workforce of roughly 2,000 individuals. As a leading partner in data, technology, and broadcasting for the sports sector, GENI operates across more than 150 countries and collaborates with over 400 sports organizations, including notable entities like the NFL, the English Premier League, and NASCAR. The company leverages advanced technologies such as big data, computer vision, and augmented reality to create immersive experiences that enrich the user experience and betting options. These technologies also facilitate connections between sports organizations and fans on a global scale. In the U.S. market, GENI is expanding its presence through strategic partnerships with the mentioned key operators.
GENI specializes in offering a broad spectrum of services in the modern digital sports arena. Their suite encompasses real-time sports data collection, integration, and dissemination systems alongside automated production and streaming technologies. They also extend comprehensive integrity services to leagues, aiding in the identification and addressing of suspicious betting activities. Moreover, they furnish live sports data, odds feeds, risk management, and digital marketing services, alongside interactive fan engagement tools that provide live stats and betting information, seamlessly catering to the ever-evolving demands of digital sports enthusiasts.
Source: Q2 2023 Earnings Slides.
In my opinion, the company's forward-thinking approach is well-illustrated by its recent strategic collaborations. GENI has proactively extended its alliance with the NFL through the 2027-28 season and renewed its betting data accord with Football DataCo until the 2024-25 season. This, in my view, not only accentuates a deepening of its pivotal league partnerships but also underscores its commitment to long-term engagement in the sector. The company’s expanded use of AI-powered tracking technology with the English Premier League and English Football League further showcases this commitment. As GENI explores new market horizons, its successful execution of digital advertising campaigns for various brands highlights its aptitude for leveraging digital platforms for broader engagement and revenue generation.
GENI's Strategic Stride & Legal Slide
GENI’s partnerships, especially with entities like the NFL, are instrumental in bolstering its integrated services, yielding stakeholder benefits across the sports, betting, and media landscapes. In my opinion, active engagement with in-play betting trends, notably live wagering during sports events, is a wise strategy. This approach not only resonates with current market inclinations but also aligns well with management’s expectations, hinting at the substantial potential for the company. For context, the online sports betting market was valued at $35.8 billion in 2022, with an anticipated growth of a 13.8% CAGR through 2031. These figures represent robust secular tailwinds for GENI. Management is evidently adopting a forward-looking stance to leverage emerging market opportunities, laying a solid groundwork for sustainable growth and a competitive edge in the dynamic marketplace.
Source: Q2 2023 Earnings Slides.
During the most recent earnings call , GENI's management provided an outlook on their performance and future. They seemed pleased with the significant increase in adjusted EBITDA, a fourfold rise from the previous year and raised the full-year EBITDA guidance by 27%. In fact, they noted GENI is on track to be cash flow positive in the second half of the year, with this trend expected to continue. It was noted a 27% year-on-year growth in betting products, with group adjusted EBITDA nearly doubling. The cost base remained flat, allowing for high-margin revenue growth. The NFL warrants agreement terms were clarified, suggesting a less dilutive outcome for shareholders.
The legal confrontation initiated by PANDA Interactive against Sportradar ( SRAD ) and GENI is more than a patent infringement case; it's a battle for control over the emergent and lucrative intersection of sports media and betting—a space where the digital and the interactive blend to redefine the fan experience. In my view, PANDA's aggressive legal stance is a strategic move to protect its pioneering innovations in a sector increasingly blending live sports entertainment with interactive betting. This is not just about defending intellectual property; it's about securing a competitive edge in a rapidly evolving industry.
Simultaneously, GENI is undergoing a secondary offering by Apax Partners LLP, selling 20 million shares with an option for 3 million more, affecting the market dynamics of GENI's stock. Although this does not generate capital for GENI nor signify a change in its operational strategy, the increased public float could influence its stock liquidity and pricing.
These parallel narratives—one legal, the other financial—reveal the multifaceted challenges and transformations within the sports data and technology landscape, where competitive edges are as much about intellectual property and legal strategy as they are about financial maneuvers and market perceptions.
Valuation Analysis
GENI, despite showcasing a robust revenue trajectory, has not yet touched the shores of profitability, a factor worth pondering for investors. Since 2018, the firm has demonstrated a compelling growth narrative with a 40.5% CAGR , propelling its revenue from a modest $87.6 million to a more robust $341.0 million in 2022. The TTM figures further accentuate this growth, registering a revenue of $368.1 million. Analysts’ estimates for 2023 and 2024, poised at $410.72 million and $482.15 million, respectively, continue to paint an optimistic financial canvas for GENI. Such revenue growth evidently stands as GENI's main value driver.
However, a discerning look into its EBIT margins unveils a less rosy picture. It's intriguing and somewhat disconcerting to note that GENI was losing less money when its revenue was pegged at $87.6 million. This scenario ushers in concerns regarding revenue quality—having high sales yet dwindling toward profitability is a scenario far from ideal. In my view, while the revenue trajectory is laudable, the underlying profitability narrative needs a closer examination to provide a holistic understanding of GENI's financial health and long-term sustainability.
Furthermore, analyzing GENI's financial potential through a DCF analysis is challenging, particularly due to the absence of positive EBIT margins in its historical records. This makes it difficult to establish a solid benchmark for projections. However, for context, it's worth noting that the average EBIT margin among GENI's industry peers stands at approximately 13.05%. Looking ahead, optimistic forecasts suggest continuous growth in GENI's top line through 2025. If these projections hold true and GENI manages to match the average EBIT margins of its peers by that time, the financial outlook could be promising.
Author's elaboration.
As you can see, it is apparent that under the given assumptions, GENI commands a valuation that appears somewhat steep at the present levels. This is a point of concern for investors, especially considering the allure of its solid business model and the favorable long-term prospects it presents. In my view, the existing valuation slightly hinders a hearty endorsement for accumulating more shares at this juncture. However, I believe it's wise for current shareholders to maintain their holdings, given the potential upside the company could realize in the future. For those not yet invested, I think GENI remains a commendable stock to keep on the radar. GENI could be a fantastic investment should the share price moderate to more enticing levels, providing a more compelling entry point.
GENI's Upcoming Report
The upcoming Q3 earnings release of GENI, slated for November 13 , warrants close scrutiny, particularly regarding its revenue growth. Analysts expect revenues of $100.36 million for the quarter, a figure that has been factored into my existing valuation model. Even a slight revenue overperformance wouldn’t significantly alter my valuation unless it surpasses expectations by 10% to 20%, possibly warranting a re-evaluation from a revenue standpoint.
Analysts also predict a loss of $0.04 per share for GENI, translating to an $8.16 million loss, or a -8.13% net margin. This could symbolize a notable uptick in "profitability," considering the company’s history of significantly negative net margins , which spanned from -28.9% in 2018 to -225.7% in 2021. Therefore, even a -8.13% net margin could be seen as a very positive development for GENI. Furthermore, it's crucial to track GENI's strategic partnership progress, especially concerning the NFL and any additional updates on in-play betting revenue figures. These factors could also shed light on GENI's long-term profitability prospects.
Overall, my "hold" rating is predicated on a balance between the expected revenue growth, leading me to have valuation apprehensions. So, a substantial revenue beat could tilt my outlook to a "buy." Conversely, if the earnings report aligns with or just slightly exceeds current estimates, it will unlikely affect my rating. Moreover, the report might offer insights into its legal hurdles and the secondary offering by Apax Partners, albeit this is more of a tail risk. Still, monitoring these elements, alongside updates on strategic partnerships and technology integrations, is imperative for a well-informed investment decision post-Q3 results.
Conclusion
GENI's global affiliations, especially with prominent entities like the NFL and English Premier League, showcase its promising potential in the digital sports sector. However, attaining profitability remains a challenge. The legal battles with PANDA Interactive and Sportradar, along with the secondary offering by Apax Partners LLP, have introduced uncertainty regarding GENI’s shares. Coupled with current valuation concerns, these factors might dissuade potential investors. Therefore, adopting a cautious stance by assigning a "hold" rating to GENI seems judicious at this juncture. Despite these challenges, GENI’s robust revenue growth and strategic partnerships continue to highlight its capability to establish a substantial foothold in this emerging market. But overall, I think it's more reasonable to wait for a better entry point, which, according to my valuation estimates, could be 21.6% lower than current levels.
For further details see:
Genius Sports: Holding The Balance Between Revenue Growth And Profitability Concerns