2023-04-04 01:02:12 ET
Summary
- The online gaming industry has seen significant growth recently due to increasing legalization and privatization, as well as rising consumer use of digital entertainment platforms.
- RSI reported strong revenue growth in 4Q22 and management's upbeat stance on iGaming legislation highlights the potential for even greater revenue growth in the future.
- RSI's attractive valuation compared to other comps in the gambling space makes it an attractive investment opportunity.
Thesis
Rush Street Interactive ( RSI ) owns their own online gaming platform, which allows them to quickly implement new features and improve the player experience. This proprietary platform is also more cost-effective and generates higher ARPU than competitors who license their technology. RSI also has control over their underlying technology stack, which allows them to scale efficiently and offer a user-friendly interface. The online gaming industry has seen significant growth recently due to increasing legalization and privatization, as well as rising consumer use of digital entertainment platforms. I reiterate my Buy rating on RSI stock following 4Q22 earnings. I think it sends a strong message to the market that management is committed to profit growth and is on the right track that management expects to generate positive adj. EBITDA in 2H23. Even more importantly, this should have sparked a wave of estimate revisions among investors who had anticipated profit coming much later. In addition, management has adopted an upbeat stance on iGaming legislation, and while there is still much work to be done before it is enacted, I highlight that RSI would be a disproportionate beneficiary, and that it could significantly accelerate revenue far beyond my own and the market's expectations. Colombia's 4Q22 growth of 89% highlights LatAm's continued attractiveness as an international growth story, and I expect the region's significance to increase as Mexico scales and FX headwinds abate.
All in all, I continue to believe RSI is well positioned to take advantage of this strong secular trend, and I reiterate a buy rating.
4Q22 results
RSI reported revenue of $165.5 million for 4Q22, which was $5 million more than consensus estimates. RSI also reported a loss of $17.3 million in adjusted EBITDA, which was slightly lower than the $17.6 million loss that was expected. Launching the platform in five new jurisdictions and a 22% increase in monthly active users both contributed to the strong revenue growth.
Growth should reaccelerate in FY24
In FY24, my model predicts growth will pick back up to 20%, driven largely by the addition of new iGaming states. Even though the legislation regarding iGaming market access is not yet finalized, the management's attitude towards it was positive and indicated that it could be the most favorable environment in a few years. I'm keeping an eye on pending legislation in the states of New York, Indiana, Illinois, Maryland, and New Hampshire because, if enacted, it would have a huge impact on the company's revenue growth prospects and, in turn, the stock price. Because of their larger market share in iGaming compared to OSB, RSI would benefit disproportionately from iGaming legislation. I think there's a good chance for an upside surprise in the United States, particularly in Mexico and Colombia, though legislation still needs to go our way for RSI to outperform greatly. RSI also saw impressive organic growth of 89% in 4Q in Colombia. I anticipate RSI taking those lessons and applying them in Mexico, where there is likely to be a much larger market opportunity.
Valuation
I believe RSI valuation is attractive vs other comps in the gambling space. RSI is currently trading at 0.9x and 0.8x 1 year and 2 year forward revenue, respectively, with 16% and 34% annual revenue growth expected over the next two years. While the growth rates are slightly lower than the average, I believe the valuation multiple discount to the average is excessive. In fact, just a year ago, RSI was trading at more than 2x forward revenue. As a result, it is not unreasonable to believe that RSI could trade at the current peer's average.
Bloomberg
Suppose RSI were to trade at 2x forward revenue (0.5x discount as growth is slower than peer’s average), it would equate to a share price of $9 ($4 more than my base case estimate of $5 as shown in my previous post).
Author's model
Conclusion
The recent 4Q22 earnings report showed strong revenue growth, and management's upbeat stance on iGaming legislation highlights the potential for even greater revenue growth in the future. RSI's attractive valuation compared to other comps in the gambling space makes it an attractive investment opportunity. Overall, I maintain my Buy rating and believe RSI is well positioned to take advantage of the strong secular trend in the online gaming industry.
For further details see:
Rush Street Interactive: Potential For Even Greater Revenue Growth