2023-08-15 12:23:20 ET
Summary
- Sportradar Group is proving out the growth story as legalized sports gambling continue to grow.
- However, after pulling back some after Q2 earnings and 52-week highs, the growth still appears to be priced into shares.
- The value opportunity is less clear now, and shares seem fairly valued.
When I was young, maybe in second or third grade, my family visited the King's Island amusement park in the Cincinnati, Ohio, area. I don't recall much about the visit, but somehow I came away from the trip there with a ballcap for the Cincinnati Reds baseball team. As a kid who didn't follow sports yet at that age, I was not already a committed fan of any other team, so I decided in my young logic that since I had the hat, I should now therefore reasonably be a fan, and thus I have rooted for the Reds ever since. Apart from a World Series victory in 1990, there have been precious few playoff appearances or seasons in which the team has been very competitive, but this season they have made a surprising push, and are in contention for their division. As a result, I have been happily following games most days on the MLB.com website, with all its charts, graphs, and statistics, or catch them in action on MLBtv (in fact, I have game one of a double header up in another tab on my browser as I am writing this article).
Major League Baseball is just one of multiple sports leagues to have a data partnership with Sportradar Group ( SRAD ), in which Sportradar tracks and provides all sorts of interesting data that makes the experience of watching the games a richer one. For the many people now living in places with legalized sports betting, data is a critical piece in forming the odds. In a nutshell, Sportradar provides useful data for sports books' oddsmakers and fantasy sports, as well to sports broadcasters and leagues. It was a company I liked but was slightly cautious about just over a year ago, with my conclusion at the time being:
Though I am long-term bullish on the company, I am starting out with a hold rating, primarily because I expect both the Federal Reserve and the European Central Bank to continue raising interest rates, and therefore I am not convinced that shares will move up in value meaningfully over the next 12 months. Over a longer horizon of 2 to 3 years, I consider them a buy.
It vastly exceeded my expectations in terms of how quickly the shares appreciated, and I let them go near a 52-week high for $15, versus the $9 price when that piece of published. The combination of marking a year since I have written about Sportradar, with my recent choice to sell, and the company's Q2 earnings that were just released, it is an opportune time to check in once again and evaluate the investment thesis.
A Review of H1 2023 Results
Sportradar announced it Q2 2023 earnings on August 9, which overall continued the strong growth narrative that has been part of the investment thesis for some time now. Revenue for the quarter came in at €216.4 million, now totaling €424.0 million through the first half of 2023, versus €345.1 million over the same period in 2022, a 23% increase and clearly on pace for record annual revenue. The company breaks its results out into three reporting segments, a mix of geography and function, with a fourth segment catch-all capturing everything else. There is one segment for all things United States, with a second one for betting in the rest of the world, and a third segment for audiovisual function in the rest of the world. All three segments saw top-line growth in Q2 versus the 2022 results: the betting segment outside the United States is the largest contributor, €114.1 million in the quarter (53% of total), followed by the audiovisual segment at €49.6 million (23%), with the United States revenues being €38.0 million (17%). The unallocated segment accounts for the balance at €14.8 million.
While the revenue growth was in-line with expectations, earnings for the quarter fell short at €0.00 per share, and €0.02 per share through the first half of the year. The underlying earnings numbers for the quarter were impacted negatively by foreign exchange headwinds, as well as a one-time loss on an equity investment. Management continues to uphold guidance previously given in March on revenue and adjusted EBITDA, which is for 25% annualized revenue growth up to ~€911 million, with an adjusted EBITDA margin of 17% - 18%, coming out to a range from €157.0 million to a high end of €167.0 million. Nevertheless, the market reaction was negative, with shares dropping ~10% on the earnings release to under $13 per share.
Apparently the guidance wasn't impressive enough, or the valuation had gotten a little bit ahead of itself.
In terms of the balance sheet, Sportradar ended Q2 with €263.7 million in cash, with plenty of additional liquidity available; they had an untapped credit line for €220 million. In terms of actual borrowings, combined current and long-term debt is just €22.3 million, and sports an overall current ratio as of 6/30/2023 of 1.48x.
Under the Hood on Valuation
Even after its recent slide, the attractiveness of Sportradar's valuation has lost much of the luster relative to when I was considering it at $9 a share. This is self evident, of course, that valuation should be somewhat more stretched unless expectations have reasonably increased to compensate, but as of yet, shares are less attractively valued now than they were last year. They have become dramatically more expensive on an earnings multiple basis (FWD P/E was ~56x in July 2022), though just modestly more expensive on forward cash flow and EV/EBITDA multiple basis (both were approximately 17x in July 2022). Its most directly comparable peer, Genius Sports Limited ( GENI ), has returned about 50% to its shareholders over the same period, while not blowing out its EV/EBITDA multiple, which stood at 22x last July. Even some in related industries, like gaming interest PENN Entertainment ( PENN ), that looked potentially inexpensive last year, have regardless shed value over the same period, producing a value trap scenario over that time-frame.
Valuation ratios, Sportradar Group and select comparisons (Author's spreadsheet; data from Seeking Alpha)
If the forward valuation trends were stable from a year ago, especially on account on stronger growth or EBITDA expectations, then I might have been more comfortable to hold onto my shares. At $15 a share and higher, however, in late July, it had really closed the valuation gap to Genius Sports on the EV / EBITDA score, and I rolled the dice that there wouldn't be blowout earnings or future guidance in my choice to sell. Even after the retreat, I don't find a compelling valuation thesis that suggests shares at $12 and change are a remarkable opportunity, although the narrative here is clearly that growth will continue to be impressive and the valuations just need time to adjust as that future growth becomes clearer.
The trajectory of EBITDA growth was on the mind of one analyst on the earnings call , generating the following interaction (lightly edited for clarity):
UBS Analyst
[So] EBITDA growth is tracking up 42% in the first half, and that is ahead of your [full year] guidance as year-over-year, you’re guiding to that 25% to 33% range for the year. Could you go over the puts and takes of kind of implied guide for the backup and also how we should think about EBITDA margin for Q3 versus Q4?
Gerard Griffin [CFO]
In terms of the implications for the second half of the year is we will obviously be continuing to invest in our products and we also have the launch of the NBA [National Basketball Association] in the U.S. So there will be some pressure on EBITDA. However what I would say is our focus on our cost management and our overall operating leverage will obviously counter some of that. In terms of Q3, we don’t give inter quarter guidance. So I’m going to defer on that.
Even though a brief exchange, I think this is likely the core of the reason for the pull back, being an implied slow-down in EBITDA growth for the second half of 2023, partly due to some expenses associated with the new partnership with the NBA.
Conclusion
I personally tend to buy shares with the intent of holding them for at least two to three years, or even longer, though like any other investor I make exceptions. Since I do not have very frequent turn over in my portfolio, a decision to sell a specific investment earlier than expected is normally caused by one or a combination of a few possible reasons: to reallocate how my portfolio is set-up, perhaps take a gain to put to use elsewhere, or simply because I think the thesis for continued holding for the long-term has run its course at the moment.
In the case of Sportradar, it was mostly driven by the last point, especially at the recent highs. While the retreat since earnings has taken off some of the froth, and I do believe that long-term growth remains in-tact for Sportradar, I think for the moment that shares are best rated as a hold as investors can get a clearer picture on the next phase of growth.
As my beloved Reds finished out their double header with a split and currently sit 3.5 games back of the division leader, I was watching a post-game breakdown on YouTube that these other fans do all season long (and is underwritten at least partially by a sportsbook). Someone asked the hosts in the chat if they would make a large wager on the Reds making the post-season this year, and neither host, as a big of a fan as each one is, was willing to say that he thought it was worth a big wager at this point in the season. While I don't equate investing to betting, in some ways I think that's a pretty fair conclusion to draw about making an investment right now in Sportradar Group.
For further details see:
Sportradar Group: Not Betting On A Repeat Performance