2023-06-09 17:46:08 ET
Summary
- Sportradar is a leading player in the fast-growing sports betting market, with strong revenue growth and profitability compared to competitors.
- The company has the potential to build a significant moat in the industry, positioning itself as the "Bloomberg of sports data".
- The stock is undervalued, with a potential upside of 85-100%, making it a buy with a price target of $22.7 to $24.5 per share.
Sportradar Group AG ( SRAD ) has positioned itself at the edge of entertainment and gambling. The company counts bookmakers such as DraftKings Inc. ( DKNG ) and FanDuel (DUEL) among its customers. It also offers services to sports leagues, teams and media companies.
A net retention rate of 120 percent is a testament to the company’s ability to grow along with its customers.
Despite growing revenue faster than direct competitors while also being net profitable, the share price more than halved since the IPO in late 2021. The good news for investors:
A Growing Market
Sports betting is a megatrend. Since the landmark ruling in Murphy v NCAA , more and more American states are legalizing sports betting. Goldman Sachs forecasts a market size of $39 billion by 2033 in the US alone. Globally, the market size may more than double until the end of the decade. For instance, research outlet Grand View Research forecasts global sports betting revenue in excess of $182 billion annually by 2030, translating to an annual CAGR of about 10.3 percent.
The current WGA strike and a possible SAG-AFTRA strike may lead to even more interest in live sports due to a lack of new TV/streaming content towards the end of this year and throughout 2024. This, in turn, would be likely to give a further boost to sports betting, as well.
Especially, live and in-game betting require state-of-the-art data solutions to function frictionlessly and reliably. With a giant sports gambling market also comes the need for fraud prevention. These kinds of solutions are exactly what Sportradar offers. Addressing these kinds of challenges is, in fact, what it was founded for in the first place. The company’s CEO and founder is a veteran of the sports betting industry: Bwin co-founder Carsten Koerl.
Impressive Revenue Growth
Sportradar earns a percentage of betting revenue, so it directly participates in its customers’ revenue growth. The same is of course true for its main rivals, but the company leads the pack in terms of growth. Sportradar is growing significantly faster than its competitors. Q1 revenue grew 24 percent YoY. The sports betting segment grows even faster at 55 percent YoY in the US (note: the figure includes the advertisement business) and 25% in the rest of the world.
The listed competitor best comparable to the company is probably Genius Sports Ltd. ( GENI ) which grew revenue by a mere 13.2 percent during the same period .
Notably, Sportradar’s Q1 revenue (€207.6 million) slightly exceeded Q4 revenue. While this does not appear too positive at first glance, one has to keep in mind that the most important event in global sports (and by extension sports betting), the FIFA World Cup, took place in December.
Profitability
Another factor that makes Sportradar stand out from among the competition is that, despite its faster growth rates, it is already profitable. The company reported a relatively minuscule €6.8 million Q1 profit (Adjusted EBITDA: 36.7 million; +37 percent YoY). The important takeaway, however, is that the business can finance itself and its growth, while also maintaining cost discipline.
I also assume that the company could easily increase profits, as much of the cost increases are a direct result of growing headcount in order to achieve growth.
The most suitable comparison, once again, is probably Genius Sports. It generated a loss of $25.2 million at less than half of Sportradar’s revenue and less than a third its of adjusted EBITDA during the same period . Other competitors are harder to directly compare because they are privately held such as StatsPerform Group or subsidiaries of larger groups like IMG Arena which is a part of Endeavor Group Holdings Inc. ( EDR ). However, Endeavor’s Q1 results report an Adjusted EBITDA of only $2 million for the Sports Data & Technology segment – which also includes OpenBet – overall with an explicit mention of “certain cost at IMG Arena” having an impact, which leads me to the assumption that IMG Arena is not profitable on a standalone basis.
In today’s environment, profitability has the potential to be a huge trump card. Competition for rights and, thereby, the cost of rights may decrease due to investors’ increasing unwillingness to provide additional capital to unprofitable companies. Sportradar, being a profitable player, might take advantage of that twofold as it would have better chances to secure more rights at a lower cost.
Great Moat Potential
I believe that the sports data will ultimately be a winner-takes-most-market. Once data has been gathered once, it is highly scalable. The same data provided to sports books can be sold to media companies or sports teams at little to no additional cost. There is also a certain flywheel effect on the advertising side: data can be leveraged across bookmakers in order to better understand (and target) individual consumers. Notably, Sportradar can potentially charge twice: first for the advertisement placed and again for the additional betting revenue.
Given that Sportradar is the fastest growing and most profitable company in the sector, I think that it could position itself as a kind of “Bloomberg of sports data”.
In order to guarantee the integrity of results, there is a clear incentive to have one definitive source of data that may serve as an ultimate arbiter of truth, even if there would be more than one company capable of providing the data in theory. Notably, Sportradar is the leading player in the football data business. They have an exclusive agreement with UEFA (which sanctions all European competitions for clubs and national teams) among others and have been providing a range of integrity services to FIFA since 2017. Football (soccer, not American football) is the undisputed global no. 1 among sports in terms of popularity and viewership. An additional boost in popularity in North America in particular is likely to be expected from the 2026 World Cup co-hosted by the US. Lionel Messi - arguably the best player to ever kick a ball - joining MLS’s Inter Miami from next season will certainly help, too. Furthermore, Sportradar also has an exclusive agreement with the NBA.
All in all, I believe that the company is well positioned to leverage its faster growth, higher profitability and its strong existing rights portfolio to build a sizeable moat. Long term, the moat may get so big, it could be considered its own island.
Valuation
So, what does all that mean for valuation? For a fast growing company like Sportradar, I believe a revenue multiple is probably the suitable method of valuation.
Currently trades at around 3.5 times revenue under the assumption of it reaching the higher end of its 2023 guidance (based on current exchange rates). Notably, Genius Sports is not far off in terms of revenue multiples.
A conservative balance sheet is also positive in an environment of high and rising interest rates. Sportradar reported net liquidity of €84 million ($93 million) as of March 31 st . That should be taken into account as well.
Given the scalability of its business model, I believe Sportradar can be valued in similar terms as Software-as-a-Service companies which, on average, trade at EV/revenue multiples between 6 and 7. Taking into account its relative strength compared to its direct competitors and its strong balance sheet, I am confident that a multiple towards the higher end of that range is not unreasonable. Hence, Sportradar could justify a valuation of at least around 6.5 to 7 times revenue, in my opinion. That translates to a share price in the range of (= 85 to 100) $22.70 to $24.50.
Risk Factors
No investment is without risk. As far as Sportradar is concerned, one risk is, of course, that legalization and liberalization of sports gambling does not happen as predicted. For example, there is still uncertainty in two of the most populous (and most enthusiastic about sports) American states: Texas will not legalize before the next biennial legislative session in 2025 and California is still in the balance after two ballot measures (Props 26 and 27 , respectively) failed in 2022. In Florida, meanwhile, sports gambling is indefinitely halted, for the time being, following a federal court ruling . Also, it is not impossible that, in the long run, sports gambling could turn out to be less recession proof and/or inflation proof than generally believed to be. “Casual” gamblers, in particular, might cut back on sports betting given decreased household liquidity. Given the industry Sportradar serves, there may also be the downside of being screened out by ESG criteria (however, I do not believe this to be a major problem in the larger scheme of things). To be clear, I absolutely believe those risks to be manageable. Nonetheless, I feel that a diligent investor should be aware of them.
Conclusion
All in all, I consider Sportradar to be the best positioned publicly traded company in a very interesting growth market. It grows revenue faster from a larger base than direct competitors, while also being profitable. The current share price does not accurately reflect that. Mid to long term, I see potential upside of at least 85 to 100 percent. Thus, I view the stock as a buy with a price target in the range of $22.7 to $24.5 per share.
For further details see:
Sportradar Group AG Is The Most Attractive Name In An Attractive Market