Why you should invest for 2023
Of all the downtrodden tech stocks available at bargain prices, Sportradar (SRAD) – the sports data giant backed by the legendary Michael Jordan – ticks all the boxes for a greater than 20% 2023 return for investors with the current price at $11.09. SRAD is a nod to outsourced trading, AI, respected ownership, revenue share business models, legalized sports betting and EBITDA-producing stocks – all themes on trend for 2023. This author’s opinion is a strong buy.
Author’s note: This is a follow-up to a previous article from August 2022 named Sportradar: A Beacon Of Growth Potential and seeks to determine whether the key factors have changed.
Reason 1: Legislation tailwinds and pent-up-demand
Ohio recently launched sports betting state-wide with up to 25 apps permitted to take wagers. Ohioans are projected to place $8bn-worth of bets this year. A scan of the list of operators shows many – if not all – are Sportradar’s customers.
But Ohio isn’t the only state which will go live with sports betting in 2023. Maryland’s first operators began accepting bets in November 2022 but more are expected to open for business in 2023; Nebraska sports betting is already legal but again operators are expected to open in 2023, while Massachusetts wagering may begin as early as January. Maine is set for its online launch, although this could be delayed until 2024. Just this week, Hawaii is attempting to legalize sports betting and poker together.
It is key to remember that SRAD retains a revenue share from bets placed, meaning every new state with legalized sports betting leads directly to top line revenue for SRAD:
There are some Sports Betting contracts with customers that incorporate a revenue share scheme. Sportradar receives a share of revenue based on the gaming revenue generated from the betting activity on the match. The revenue share gives rise to variable consideration for each match, which is initially constrained until the related performance obligation is satisfied at the point in time when the customer generates gaming revenue.
Who would bet against a change in tune for California, Texas and Florida? These states and others will have watched the FIFA World Cup numbers with many outlets reporting record betting turnovers. For instance, in New York, the nine licensed operators surpassed $350m per week, leading to a predicted record month.
The growth in sports betting across the US is a major positive but what about elsewhere? Brazil is expected to proceed with either a new-and-improved sports lottery or go back to the drawing board on legalized online sports betting. In Canada, legislators are eyeing legalizing sports betting in other provinces with the successful launch in Ontario. Peru wrote sports betting into law and 2023 will be the first full year of trading. More surprising is the United Arab Emirates’ changing stance to gambling with casino and sports betting ventures expected in 2023. India is preparing to legalize online betting and has already drafted rules to oversee the process. Even China reported record lottery sales boosted by the World Cup.
2023 is a watershed moment for sports betting – and SRAD – with governments embracing legalizations with a means to gain enormous and hitherto unrealized taxable revenue. There is no question that 2023 will see a continuation of the upward trend in legalization momentum which will increase investor confidence in SRAD into Q3 and Q4.
Reason 2: Four consecutive positive quarterly earnings
In the lead-up to Q4 2022 and year-end earnings, I revisit the previous four quarters of SRAD, with them having only posted five quarterly results since becoming a public company:
In their second quarter as a public company, SRAD announced a YoY revenue increase of 41% and a guidance beat on both revenue and EBITDA.
In the first quarter of 2022, SRAD beat its revenue guidance by $19.71m leading to an EPS of 0.04 vs. an anticipated 0.03
In the second quarter of 2022, SRAD fared even better, increasing revenues in the US by 66% and global revenues of +23% YoY, realising EPS of 0.05 vs. an expected 0.04.
Finally, in its latest quarterly earnings, SRAD saved the best until last. Revenue was up 66% in the US YoY, with the company as a whole posting 31% YoY growth, leading to Jeffries increasing their price target to $18.
You’d be a brave investor to bet against SRAD once again surpassing analysts’ expectations in its next four quarters.
Reason 3: SRAD generates profits (not the norm)
At every opportunity, SRAD likes to point investors to their free cash flow generation. For instance, they generated €33.9m in Q3 2022 and have over the course of time generated hundreds of millions in profits. They used this money to pay down their bank debt which sent their stock price soaring on November 16th.
This trend of profitability is not the norm in the sports betting industry. In fact, almost every other major company in the (primarily online sports betting) space is losing money. Below is a summary of the main players and their latest quarter and yearly net losses:
Q3 2022 Net Loss
2022 First Nine Months Net Loss
Genius Sports (GENI)
Rush Street Interactive (RSI)
DraftKings Q3 Earnings, Genius Sports Q3 Earnings, RSI Q3 Earnings
The list goes on and the takeaway is that investors seemingly tar SRAD with the same brush as the companies who are paying for revenues through expensive advertising. In 2023 where profit is treated as a premium, SRAD are the dependable stock to sensibly grow their operations – and therefore your investment.
Reason 4: Business model and product portfolio
When valuing a business, revenue generation, margin and free cash flow are important, but it is the “how” which drives these metrics. How does SRAD solve its customers’ problems to maintain their high net revenue retention rate of 120%?
SRAD’s underlying business model is described in their annual report as follows:
We have a highly attractive business model characterized by robust growth and strong profitability. We generate revenue through a combination of subscription and revenue-sharing contracts. This provides us with a steady, predictable revenue and significant upside as the sports betting market grows. We also have a track record of growing wallet share with existing customers. Our Dollar-Based Net Retention Rate as of December 31, 2021 and 2020was 125% and 113%, respectively.
Or put more succinctly and shown by the below graphic, they buy data and video from sports leagues, apply some proprietary techniques and value-adds, before selling it to betting operators and media companies, thus taking a share of the end user or sports bettor.
SRAD also has a growth model which is refreshing to see. They intend to take advantage of the growth markets, selling high margin products but treating investors’ money as sacrosanct. This is the type of rhetoric investors want to hear in 2023 and if SRAD executes with another four quarters of growth, their stock price will surely have climbed to $13-$15 from a current $11.09.
Armed with a scalable and sustainable business model, half the battle has been won and puts SRAD in prime position to take advantage of the aforementioned legalization tailwinds. Plus, they have cash on hand if market conditions change.
Reason 5: Institutional Ownership
SRAD’s top 10 owners are an eclectic group. Canada Pension Plan Investment Board maintains a huge 47% share. Some of their private equity investments include Qlik, Refinitiv, Ascot Group, Axel Springer and Endeavor. Considering their focus is on capital markets investments as well as stable real assets investments, such a large stake in SRAD is highly encouraging. Meanwhile, Radcliff Management LLC appear to hold SRAD and Sweetgreen Com. The rest are regular investment houses such as Janus Henderson who have stakes in AAPL and GOOG. Finally, Bank of America’s new stake of 1.2 million shares is the standout purchase.
Risks to Thesis
The most overt risk to SRAD’s future growth is a lack of market growth via legalization. If doors are firmly shut in California, Texas and Florida and countries such as Brazil and India reverse or slow yet further, the market may turn on the hype for gambling stocks and therefore SRAD.
Was SRAD’s first financial year as a public company a fluke? They beat expectations in the last four quarters but if growth – and particularly EBITDA – slows, the market will surely punish SRAD.
There is little risk regarding SRAD’s business model per se since the market already accepts they have a sound value proposition which generates ever-increasing profits. However, two factors could interfere or interrupt SRAD’s free cash flow generation: 1) higher sports leagues rights costs and 2) stronger competition. Interestingly, In Q3 2022, SRAD’s sports rights costs actually decreased from 21% to 19% as a percentage of revenue showing some evidence to the contrary of this particular risk. As for the competition, with no profitable rival in sight, there is little danger for 2023. In fact, in the last earnings call, their rival Genius Sports was only mentioned once in relation to a settled court case.
Overall, the risks are outweighed by the benefits, but it is important readers are braced for the advantages to take effect over the entire course of 2023.
SRAD has consistently hit its numbers since becoming a public company, and all signs point towards a successful 2023 on account of: exciting tailwinds, disciplined spending, a profitable business model and finally investor confidence. Normad Capital recently suggested a 15% upside in SRAD for 2023. As of 01/18/23, SRAD is valued at $3.30bn market cap, which is just 3.4x 2023 sales, and for such a stable company I can get on board with a current P/E ratio of 25x.