Genius Sports is affecting a merger with dMYD Technology Group II ticker symbol DMYD. Following the merger Genius is likely to trade on the NYSE under the ticker GENI.
I don’t like a lot of SPACs but Genius Sports looks to be an interesting business and has not yet been the target of rampant speculation. The company operates as part of a duopoly in the high growth sports betting industry.
What does the company do?
According to the website, “Genius is the official data, technology and commercial partner that powers the global ecosystem connecting sports, betting and media.”
Basically, Genius collects live sports data and distributes it to firms across three segments; sports, data and streaming (mostly sportsbooks), and media.
Sports companies use Genius data to analyse matches, scout players and improve team performance (Moneyball style). In 2020, this segment made up 11% of Genius’ forecast revenue.
Betting platforms like Flutter use Genius to price their sportsbooks and deliver competitive in-play betting. In 2020, this segment made up the bulk (74%) of forecast revenue.
Media companies use Genius data to engage and entertain customers, run ads and sell tickets. In 2020, this segment made up 15% of forecast revenue.
This trifecta gives Genius sports a lot of options with which to drive future revenue.
By entering into long-term contracts with various players, Genius is able to derive guaranteed revenues while also making the most of upsell opportunities.
Genius also seeks to grow by expanding into new markets and new sports. A key strategy is to capitalise on long tail sports events. Such events are still followed by gamblers but come with lower costs than events from more competitive matches.
In 2020, the company boasted:
650+ long term partnerships with sports and sportsbooks
400+ sports partnerships including NBA, NCAA, FIBA, FIFA and the Premier League.
1,500 employees across 6 continents
$110m invested in scalable proprietary technology
Sector Growth
Sports betting is undoubtedly the most lucrative source of revenue for Genius and is an industry with tremendous opportunity.
With the loosening of gambling regulations, sports betting revenue in the USA is expected to grow around 33% per year to $8 billion by 2025 and this figure could increase further depending on how many more US states legalize gambling operations.
With many states facing up to the costs of the pandemic it’s not fanciful to suggest that more states will jump on board as means of generating additional revenue.
Genius is also focussed on expanding in emerging markets and is already present in over 150 countries. As the world comes out of the pandemic, the sports industry could experience a period of renewed growth.
TAM
According to a 2018 report from Research And Markets, the total addressable market for sports analytics is expected to reach a revenue of $4.5 billion by 2024, representing a compounded growth rate of 43.5%.
If Genius was able to capture one tenth of that, the company would be pulling in $450 million by 2024, a growth of 32% on 2020 forecast revenues.
The company was able to grow revenue by 26% in 2020 despite the cancellation of numerous sporting events due to the pandemic. However, it’s worth noting that these 2020 figures are forecast figures, not actuals, because the financial year is not yet finalised.
Competition
There are two main players in this market, Genius and Sports Radar, which operate as a kind of duopoly. There are smaller players such as the likes of IMGArena and Stats Perform but they are unlikely to pose a major threat and could potentially be an acquisition target.
The fact that Genius has a dominant position with locked-in contracts gives the company competitive advantages and some network effects. Sports betting is also an addictive product that means demand for Genius’ data is unlikely to go away soon.
Margins
According to official documentation, Genius Sports is currently operating a 10% EBITDA margin but hopes to achieve a long term target of 40%. Costs are fairly evenly distributed between direct costs (including data production, technology and hosting), rights costs (the cost to be able to collect data from sports events) and payroll costs.
As mentioned, a key strategy for Genius is to bring on board new deals with lower tier sports teams which will help to reduce the rights costs to sporting events.
Overall, business costs are not directly related to growth, meaning future growth should not lead to diminishing margins. Overall, the company has significant costs, but it is more of a cash-cow than a cash-drain.
Valuation
Based on the current market price of $16.30 and total shares outstanding of 167.7 million at completion of the merger, Genius (trading as DMYD) has a current enterprise value around $2.7 billion. When the merger is completed the company should have zero debt on the balance sheet and $150 million in cash.
This valuation means the company is currently trading around 18 times 2020 revenues and 14 times next years revenues. That compares with DraftKings (DKNG) currently trading at 35 times revenue and Evolution Gaming (EVVTY) currently trading at 32 times revenue.
Meanwhile, Penn Gaming (PENN) trades at 4 times revenue and MGM at 3.7 times revenue . Analytics company DataDog trades at 40 times revenue while Alteryx trades at 11 times revenue.
While 18 times revenue for Genius sounds expensive, it’s important to consider the rate of growth and the prospect of increased margins. Let us consider two scenarios.
Genius grows revenues at 20% per year for 10 years and then trades at a multiple of 11 times revenue (in line with data analytics companies today). Under this scenario, Genius would be worth around $9.5 billion in 10 years time, giving an investor a 13.4% annualised return over that period.
Genius grows revenues at 25% per year for 10 years then trades at a multiple of 15 times revenue. Under this scenario, Genius would be worth $19.5 billion, giving an investor a 22% annual return.
These scenarios are hopefully somewhat conservative. Genius is still a small company with potential to compound it’s own revenues and be richly priced by other investors.
Of course it would be nice to get Genius for closer to $10 or $12 but the stock may not get that low again.
Risks
The form F-4 details a number of risk factors with the company that are worth considering.
Among these is that gambling regulations could be introduced, or re-introduced, in any of the company’s markets causing a drop in demand for the company’s services.
Investors should also consider the possibility of Genius losing clients and reputational risk with its data.
For example, if Genius is unable to delivery data quickly enough or if it delivers data containing errors it could lead to reputational risk and a loss of confidence.
A third risk is that sports betting (and sport in general) doesn’t produce the kind of growth investors are expecting and this leads to a de-rating of the investment multiple.
For example, it’s mentioned as a positive that Genius was able to grow revenues in 2020 despite COVID-19 shuttering sports events. However, the fact is that 2020 was a record year for sports betting with many bored gamblers with stimulus checks stuck at home. Therefore, Genius should have grown revenues in 2020 (and it did).
Another risk is that sports teams begin to charge more for collecting their data and Genius is unable to improve it’s margins as expected. There is a risk that the company performs well but the initial price paid for the stock is not low enough to generate an adequate market return.
Bottom Line
Every investment comes with risk but Genius Sports stands in front of multiple tailwinds thanks to the relaxing of regulations in the US sports betting industry and the rise of big data.
The company is uniquely placed with a niche service, sticky revenue and operates in a near duopoly. Using somewhat conservative metrics Genius could outperform the market over the next ten years but I’m also optimistic the stock will outperform those projections.
Finding quality companies at reasonable prices is not easy in todays market but I feel that Genius has some favorable qualities and the valuation is reasonable. I picked up some shares at $16.03 and intend to hold for the long haul.