2023-09-30 23:58:43 ET
Summary
- Rush Street Interactive operates in the online gaming and sports betting industry, with potential for growth in emerging markets.
- The company retains and grows regular users through proactive market entry strategies and technological advancements.
- The U.S. online sports betting sector is projected to reach $14 billion in revenue by 2027, presenting untapped growth potential for RSI.
- RSI's Q2 2023 financials show a revenue of $165.1 million and a positive adjusted EBITDA of $1.2 million, marking a transition towards profitability.
- My valuation analysis suggests RSI is fairly valued, so I give it a neutral rating.
Rush Street Interactive, Inc. ( RSI ) operates in the competitive online gaming and sports betting landscape, offering promising growth prospects. Its commitment to customer satisfaction strategically places it to tap into the potential of emerging markets, especially in light of the pivotal 2018 Supreme Court ruling. Yet, a detailed analysis of its financials indicates that RSI faces operational and fiscal challenges that must be addressed to ensure sustained profitability. Given the industry's dynamic nature, RSI's future trajectory largely depends on its ability to improve its profit and EBIT margins. While the company seems to be progressing positively, achieving positive EBIT margins by 2025 will be a key determinant in justifying its current market valuation. My valuation model suggests that RSI is fairly valued, so I give it a neutral rating.
Business Overview
RSI, originally structured as a blank check company or SPAC, underwent a merger with dMY Technology Group Inc., effectively marking its entry into the public domain. Today, RSI operates in the online casino and sports betting environment across the US, Canada, and Latin America, among other regions. It offers real-money online casinos, online and retail sports betting, social gaming services, marketing under BetRivers.com, PlaySugarHouse.com, and RushBet brands. RSI’s revenue model is mainly B2C with a growing B2B aspect. Concretely, RSI provides an omnichannel platform for the land-based Sportsbooks at Rivers Casino Pittsburgh, Rivers Casino Philadelphia, Rivers Casino Schenectady, Rivers Casino Des Plaines, and French Lick Casino in Indiana. So overall, RSI is a sprawling gaming operation spanning 15 U.S. states and three international jurisdictions.
One of RSI's standout features is its focus on retaining and growing regular users. According to RSI’s latest 10K , its user-centric loyalty program and the possibility to be "first to market" in several jurisdictions are two valuable marketing tactics. In my view, such proactive market entry strategies can offer a competitive edge, especially in an industry that values innovation and rapid adaptation. Moreover, RSI’s growth strategy relies on technological advancement, exclusive content access, and customer reach expansion.
In fact, according to Eilers & Krejcik Gaming (“EKG”) , the revenue from the U.S. online sports betting sector reached approximately $6.9 billion in 2022. A more granular analysis reveals an impressive revenue CAGR of 141% from 2019 to 2022. This robust growth trajectory is attributed to two primary factors: the increasing number of states regulating online sports betting and the nascent stage of the market. EKG's projections indicate a continuation of this upward trend. The forecast suggests that the revenue from online sports betting is expected to exceed $14 billion by 2027. This projected growth encapsulates the expanding regulatory approval and the continued maturation of the market.
RSI's Investor Presentation Slides - August 2023
Secular Tailwinds and Untapped Growth Potential
However, the broader landscape of sports betting in the U.S. experienced a transformative change on May 14, 2018, when the U.S. Supreme Court declared the Profession and Amateur Sports Protection Act of 1992 unconstitutional. This landmark decision paved the way for 35 states and the District of Columbia to legalize sports betting. Notably , out of these 36 jurisdictions, 26 have embraced online sports betting, while the remaining 10 have confined it to physical venues like casinos. I believe the 2018 Supreme Court ruling was a watershed moment, both legally and economically. The subsequent growth in the sector has been nothing short of remarkable, with projections indicating that online sports betting revenue might surpass $14 billion by 2027. However, considering that only approximately 47% of the U.S. population currently has access to online sports betting , I think a vast untapped potential is waiting to be explored.
EKG United States Sports Betting Policy Monitor – Released January 2023
The growth in online gaming, I believe, stems from regulatory shifts , tech advancements, and evolving consumer preferences. While sectors like banking in the U.S. adopted digitalization early on, the gaming industry's digital transition has been more recent. Furthermore, developed nations, often with higher disposable incomes, lead this trend. Countries such as the U.K. and Denmark, categorized as "high income" by the World Bank, have already embraced online gaming, hinting at a link between economic well-being and gaming adoption . Yet, the U.S. remains a pivotal player in this arena.
Pennsylvania Gaming Control Board (left), New Jersey Division of Gaming Enforcement (right)
The online gaming and entertainment industry, encompassing everything from lotteries to e-sports, represents more than mere entertainment. It's a confluence of various stakeholders, including casinos and sports teams, each shaping its trajectory. The industry's growth, marked by a 131% CAGR from 2019 to 2022, is undeniably impressive. I believe this surge results from regulatory changes and technological innovations. The U.S. market , in particular, has shown promising signs, with a 63% increase in online gaming revenues from 2021 to 2022.
I believe there remains significant untapped potential, especially in densely populated states like California and Texas. Observing the U.S. landscape, the distinction between online casinos and sports betting becomes clear in their growth and state-level endorsements. Despite the introduction of online sports betting, New Jersey's consistent growth in online casino revenues might be a compelling model for other states. I think the U.S. online gaming industry is on the brink of a significant transformation. With the potential to generate revenues of $48 billion and $23 billion for online casinos and sports betting, respectively, the future holds vast opportunities, especially if nationwide legalization comes into play.
Valuation Analysis
RSI's performance in Q2 2023 provides a deeper understanding of its financial trajectory. The company reported a revenue of $165.1 million, reflecting a 15% YoY growth, which is commendable. What's particularly noteworthy is the adjusted EBITDA profitability for this quarter, registering at a positive $1.2 million, especially when contrasted with the EBITDA loss of $18.6 million from the same quarter the previous year.
Seeking Alpha plus author's elaboration.
This shift underscores RSI's resilience and capacity to enhance operational efficiency in the face of market changes. While achieving EBITDA profitability is a significant milestone, the ultimate goal should be consistent EBIT profitability, as it offers investors a more concrete measure of success. The reason is that EBITDA can sometimes mask certain expenses, whereas EBIT provides a clearer picture of operational performance.
Seeking Alpha plus author's elaboration.
RSI has experienced consistent revenue growth since 2020, with a CAGR of 22.2%, reflecting its effective market strategy and capacity to generate value. Concurrently, the reduction in EBIT loss at a CAGR of 35.9% indicates an efficiently growing company. In 2025, revenue projections are set at approximately $968.4 million, accompanied by a positive EBIT of $44.6 million. These figures underscore the company's promising trajectory, especially considering my valuation model. Utilizing the FCFF DCF method and a CAPM discount rate of 12.13%, I estimate RSI's current value to be around $1.04 billion. This suggests a slight 2.6% potential decrease from its existing market position, leading me to believe that the market has largely accounted for RSI's growth potential. Based on this analysis, RSI might be appropriately priced at present.
Seeking Alpha plus author's elaboration.
RSI's upward trajectory presents significant potential, especially in untapped markets such as California and Texas. However, to truly harness this potential, RSI must adopt a comprehensive strategy beyond mere top-line growth and ensure that such growth is reflected in the bottom line. I believe the key to achieving this lies in streamlining operations, optimizing costs, and emphasizing efficiency. While the company's recent performance indicates a transition phase, the journey to consistent profitability and enhanced shareholder value demands continuous oversight, adaptability, and strategic planning. This is because a company's success is not just about capturing new markets but also about efficient management and foresight.
Conclusion
RSI looks like a solid online gaming and sports betting business, showcasing a blend of growth opportunities. Its customer-focused approach positions it well to capitalize on emerging markets, particularly following the 2018 Supreme Court decision. However, examining its financial performance, there are operational and financial hurdles that RSI still needs to overcome for long-term profitability. In my view, the industry's rapid evolution means that RSI's future success hinges on its dedication to enhancing its profit and EBIT margins. While RSI is on a positive trajectory, by 2025, achieving positive EBIT margins will be crucial to validate its current market valuation. Based on my analysis, RSI appears to be appropriately priced, so I give it a neutral rating.
For further details see:
Rush Street Interactive: Fairly Valued Amid Secular Tailwinds In Online Gaming