2023-06-06 06:29:44 ET
Summary
- Rush Street has a proprietary online gaming platform that allows for quick implementation of new features and improved player experience, potentially leading to higher ARPU.
- RSI's 1Q23 results showed a significant improvement in adj. EBITDA margin, suggesting the company is on track to become profitable in the near future.
- RSI stock's current valuation is attractive compared to peers, and as profitability becomes evident, the share price is expected to rise.
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. Even though the stock hasn't done as well as I'd like it to (something I attribute to the macro environment), I still find the potential gains to be compelling. Based on the results of the most recent quarter, I believe that RSI is well on its way to profitability and will continue to reinvest in those areas where it has a competitive advantage by developing proprietary features and functionalities that drive market share. In my opinion, RSI's stock price will begin to respond eventually now that profitability is on the horizon. I reiterate my buy rating .
Solid margin improvement
As there was no coverage on RSI 1Q23 performance, I would give the headline numbers here for easier reference. In 1Q23, RSI generated $162.4 million revenue and $8.7M of Adj. EBITDA loss. While some might argue that RSI missed consensus 1Q23 revenue estimates, I believe the focus was not on the revenue line, instead, it is on the adj. EBITDA line which came in much better than I expected. Adj. EBITDA margin is now ~-10%, which is a ~450bps improvement from previous quarter and 25pts improvement from 1Q22. This suggests that RSI has found a way to moderate its marketing expenditures to maintain 20+% growth, and I anticipate further slowdown in marketing expenditures for the remainder of the year due to the fewer number of new state launches and more rational competition. In short, there is a good chance that RSI can exit FY23 at adj. EBITDA positive on a run-rate basis. While consensus is already expecting this in 4Q23, with ~$5 million adj. EBITDA, I believe there is a part of the market that is not buying this yet. As such, the moment RSI passes that hurdle to become adj. EBTIDA positive, I believe the fund flows into RSI will push valuation and the share price up. This is especially true when we comps RSI against peers.
iGaming
I think RSI has been so successful because of their knowledge of iGaming and the fact that they have figured out how to enhance the user experience with games like Bingo, scratch offs, slot tournaments, and squares. While there is no standard way to measure user experience, I believe the metrics released by management during the 1Q23 earnings made it clear that players retention rates are strong (which supports the idea that user experience is great).
I remain optimistic about the iGaming industry as I believe the current macro turmoil, high rates, and high inflation have forced many players to start being more rational in terms of sales & marketing spend as individual state markets mature and an increasing focus by operators on profitability. This dynamic should benefit RSI more than the typical Online Sports Betting players as RSI has a larger portion of its revenue tied to iGaming (74% as of 1Q23).
Valuation
I continue to believe RSI valuation is attractive vs other comps in the gambling space. RSI is currently trading at ~1x and 0.9x 1 year and 2 year forward revenue, respectively, with 13% and 28% 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. I acknowledge the comparison to Churchill and DraftKings (DKNG) might not be the best, which is also why they trade at a premium. However, if we compare it to Bally’s Corp. (BALY), I believe RSI should trade at similar levels once it starts turning profit. A key reason why RSI is trading at a discount today, I believe, is because it is not profitable.
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 $7.73. While this is a lower price target than my previous post, I believe the upside is still very attractive, regardless.
Conclusion
RSI shows promising signs of improvement and potential profitability. The company's solid margin improvement and reduction in marketing expenditures suggest a more rational approach to growth. As the macro environment stabilizes and profitability becomes evident, RSI's stock valuation should align with its peers, and I expect RSI's stock price to inflect.
For further details see:
Rush Street Interactive: Valuation To Inflect Once Stock Prints Positive Adj. EBITDA