TLDR

• Sports data provider SRAD has been punished along with sports betting peers, falling nearly two-thirds since its IPO last year.

• But the business is performing well, and known risks seem overblown.

• Shares aren’t cheap, but given growth prospects SRAD seems worth paying up for.

From the jump, Sportradar AG SRAD 0.00 has been a disappointing stock. The company’s initial public offering in September of last year priced at $27. SRAD closed its first day of trading down 10%. By year-end, the stock was below $18. It closed Friday at $9.56.

But as far as the company’s performance goes, the provider of data for sports betting operators and media companies hasn’t disappointed much, if at all. Indeed, here is how SRAD has performed on the day of each of its four earnings reports since going public (the Swiss company reports before the US market opens):

• Q3 2021: +0.8%

• Q4 2021: +13.3%

• Q1 2022: -5.7%

• Q2 2022: +11.6%

Obviously, the stock’s performance in four single trading sessions doesn’t prove the business is executing well. But Sportradar has been on point with guidance, exceeding its 2021 outlook and raising its revenue projection after the second quarter release in August. Nor have there been any big drops in the stock during the 65% decline from the IPO price: the two worst trading days (-12.1% and -12.0%) came in sharply red, “risk-off” sessions for the broader market.

What’s happened, rather, is that the euphoria toward the sports betting space has fizzled. In fact, the mania had already begun to fade when Sportradar went public. As we noted here back in April, most sports betting stocks hit their highs in the first quarter of 2021.

Sportradar itself wasn’t immune. The company originally planned to go public by merging with special purpose acquisition company Horizon Acquisition II HZON 0.00 at a $10 billion valuation. Rumors swirled but the tie-up was never actually announced. The problem (reportedly) was that Horizon and Sportradar couldn’t line up potential investors in a PIPE (private investment in public equity) transaction at the $10 billion figure. Sportradar instead went the IPO route a few months later, pricing at a roughly $8 billion valuation.

For the sector, it’s gotten worse since then:

source: YCharts. Chart since 9/15/21

Certainly, there’s some logic to the sector sell-off. The legalization of sports betting1 in the U.S. in late 2018 opened up a potentially enormous market. The simple nature of the narrative — sports betting companies will make billions! — fed perfectly into the bubble that began in September 2020. But the story for operators is not nearly that simple.

Sports betting is simply not a hugely profitable business. In the U.S., hold (the percentage of bets kept by sportsbooks) has averaged 7.4%. Breathless reporting of the amount wagered — $52.7 billion last year, and more in 2022 — often conflated turnover with revenue. In fact, total US revenue is only several billion dollars annually.

Given competition, that’s not a huge figure. Taxes are another issue, as states consistently have looked to take their cut. New York state ‘leads’ the way with a stunning 51% rate. That leaves operators in the largest currently legalized market essentially unable to turn a profit.

And so along with electric vehicle stocks, and crypto plays, and flying taxis, online gambling stocks absolutely had to crash. The valuations were unsustainable even if the businesses were as attractive as many investors believed (which they were not).

But here’s the thing: Sportradar is not the same as other online gambling stocks.

Introducing Sportradar

Sportradar’s core business is collecting and distributing sports data worldwide. At the end of 2021, the company had over 1,700 customers. More than half are sports betting operators; another 500-plus include media and digital outlets. The company has customers in over 120 countries.

Sportradar sources the data using agreements with over 150 major leagues. Outside the U.S., the company has exclusive agreements with the National Basketball Association, the National Hockey League, and Major League Baseball. It’s the exclusive distributor for the Union of European Football Associations (UEFA), and the official data partner for the International Tennis Federation.

Since its founding in 2001 and the launch of its data product three years later, the company has steadily expanded. Sportradar now has a large audiovisual business, which for instance supports the back end for NHL.tv worldwide. Sportradar also offers a turnkey solution for sportsbooks, including trading services, odds, and liability management. A programmatic ads business is performing well, with growth targeted to 40%-plus in 2022.

Those new products are part of a “land and expand” business model, in which Sportradar leads with a single product (often data) and then upsells incremental offerings. It’s been a successful model so far. Revenue increased at a 24% compound annualized growth rate between 2016 and 2021. And Sportsradar remains nicely profitable, with positive free cash flow and Adjusted EBITDA margins guided for 17% to 19% this year.

The Bull Case for SRAD

Despite the sell-off since last year’s IPO, it’s worth noting that this seems an exceptionally attractive business.

Historical performance has been impressive:

source: Sportradar F-1

In 2021, revenue increased 39%, and 34% pro forma for the acquisition of Atrium Sports. The company is guiding for 24% to 27% growth in 2022; that figure was actually raised five-plus percentage points after the second quarter.

There seems plenty of room for top-line growth to continue. Data has underpinned revenue performance to this point — and should only become more valuable going forward. Better collection and lower latency (the time it takes to transmit data) open the opportunity for new types of in-play betting and improved media coverage. Per the Q2 call, in the wake of recently extended deals (notably with the NBA), Sportradar is in talks with major customers for a value-based pricing model, which suggests higher revenue and margins.

Of course, the American market is an enormous opportunity. The U.S. accounted for 16% of revenue in the first half of this year, up from just 7% two years earlier and 10%-plus in 2021. In its F-1, Sportradar cited estimates that the market could reach $23 billion in revenue at maturity, against just $1 billion in 2019. The agreements with the NBA (which actually generates greater handle than the more popular NFL) and NHL add value to data in the market. (Handle is simply the amount of money wagered by bettors).

In-play betting is another potential catalyst. After Q2, Sportradar said it had about 70% market share in U.S. live betting. But live penetration in the U.S. is only about one-third of bets, against 70% to 80% in the more mature European market. The programmatic ads business is focusing on the U.S. to begin with, and as noted posting strong growth.

But it’s the move beyond data that makes the mid- to long-term story particularly intriguing. Already, Sportradar is a player in the outsourced side of the business. Managed Betting Services (MBS) revenue neared one-third of total revenue in the first half of this year, and grew 58% year-over-year. Founder and CEO Carsten Koerl said after Q2 that the transaction volume makes Sportradar one of the five biggest bookmakers in the world.

And notably, per the Q1 call, the take rate in MBS is much higher: about 5% to 7% of handle against ~2% for data. For now, MBS revenues are largely coming from smaller sportsbooks; for larger books, revenues come largely from niche sports. But there are some hopes that Sportradar’s trove of data can improve its operations to the point that it can move up the ladder to larger operators with insourced trading operations2.

There’s a solid moat here as well. The data side of the business largely is a duopoly between Sportradar and Genius Sports GENI 0.00 . Between rights agreements with leagues, the infrastructure required (Sportradar still requires data journalists to attend games) and the value of historical data, barriers to entry remain high.

All told, the bull case for the Sportradar business seems relatively easy to make.

The Bear Case

To be fair, the same is true for the bear case.

Macroeconomic concerns are a risk. The United Kingdom is the biggest market, at 12% of 2021 revenue.Between Brexit, a debt crisis, and a steady increase in restrictions on gambling advertisements, pressure on handle seems likely. Outside the UK, and potentially even the US, a recession pressure revenue for Sportradar customers, which in turn will hit revenue (and margins) for Sportradar itself given some exposure to revenue-share contracts.

Structurally, the worry is that the business is perhaps not quite as strong as historical financials suggest. One analyst on the Q4 call noted “one of the big bear thesis points”: that the business doesn’t really scale. Again, Sportradar requires data journalists to actually attend games. (The time lapse created by video transmission would make remote collection impracticable.) Most MBS revenue comes from yes/no decisions on submitted tickets; there are some artificial intelligence/machine learning possibilities there, but that business is nowhere near fully automated, nor will it be.

Even the duopoly raises a risk. Genius Sports took the NFL from Sportradar as a client last year. It didn’t necessarily do so by outcompeting its rival. Instead, it gave up 7% of its equity via warrants with an exercise price of a penny, while also paying the league cash on an ongoing basis. When Sportradar extended its NBA deal, it gave up ~3% of its equity, with the NHL getting a similar, if less lucrative agreement.

Instead of the duopoly serving to protect margins, the worry is that competition will compress margins.

Neither argument appears to really hold up, however. On the Q1 call, CEO Koerl argued that the industry was “resilient” during recessions during his 20-plus years in the industry. (Koerl co-founded bwin, which now is part of Entain, in 2001.)

The data appears to bear out his point:

source: Deloitte

Paddy Power (now part of Flutter Entertainment plc) grew online handle 31% that year. Paddy took market share that year, and online sports betting was still relatively new at the time. More broadly, the gambling industry is somewhat cyclical, but not as cyclical as many think.

As far as structural concerns go, they too appear overblown. The warrant deals with the major U.S. leagues don’t appear to be replicable elsewhere. Global leagues don’t have the same level of pricing power. The one that might, the English Premier League, should re-open its contract in 2024 after Sportradar and Genius settled a long-running lawsuit earlier this month. But the worry that Sportradar is going to be giving away 3% of its equity over and over again seems unfounded.

Meanwhile, those deals are coming because leagues have pricing power. But Sportradar (and Genius) have their own pricing power. As MBS and the ads business grow, the relative importance of data profits (and margins) moderates.

In fact, it’s worth noting that Sportradar’s Adjusted EBITDA margins are expanding, to a guided 17%-19% this year from 16.6% in 2019. That’s with increased public company costs and much higher losses from the U.S. market, which remains unprofitable on an EBITDA basis. Long-term, per management, cash flow conversion should be 55-60% of EBITDA. That means with a profitable U.S. business, free cash flow margins should be comfortably in the double-digits. Those margins plus an attractive top-line outlook seem worth paying up for.

Valuation

Admittedly, to some extent investors are already paying up for SRAD. But they’re probably not paying quite what headline multiples would suggest.

Based on analyst consensus, SRAD trades at 50x this year’s earnings per share. Based on the midpoint of guidance, EV/EBITDA is 21x. At the first-half run rate, EV/EBITDA is about 26x when excluding share-based compensation.

But, again, the U.S. business is unprofitable, posting an Adjusted EBITDA loss of $11.9 million3 in the first half.

Relative to the non-U.S. operations, at the midpoint of guidance, SRAD is down to about 17x EV/EBITDA4, and ~21x adding back stock-based comp. At normalized free cash flow conversion, and including share-based comp, EV/FCF5 gets to about 30x.

That sounds like a huge multiple. But it’s a multiple Sportradar can easily grow into. The U.S. business will both grow nicely and move well beyond breakeven: doubling revenue from 2022 and getting margins to 10% (below the consolidated average) suggests an incremental ~$11 million in EBITDA, and (at a 14.5% tax rate) more than $9 million in free cash flow.

The non-US segments grew EBITDA 38% between 2019 and 2021; guidance suggests another 20%-plus increase this year. Yet the stock is pricing in low- to mid-teens free cash flow per share growth going forward.6

Again, bears will argue that kind of outlook is far too optimistic, given macro and competitive risks. From here, however, recent developments and the notable change in sentiment toward the U.S. market are driving that erroneous perception. This is precisely the kind of business that can grow at an even faster rate for an even longer time, given net revenue retention (110%-plus), minimal churn (sub-1%), and growth in new markets beyond the U.S. (including Asia and Latin America). And, we’d argue, it’s a better business than Genius, with higher margins and greater revenue, while the two stocks have multiples roughly in line.

The fundamental discussion admittedly circles back to the qualitative debate. If a recession tanks growth or if the warrant agreements with the U.S. leagues lead to a race to the bottom, SRAD probably disappoints.

But we’d return to our original point. So far, it’s the stock, and not the business, that has disappointed. Down nearly two-thirds from the IPO price, that pattern isn’t going to hold. As long as the business holds up, SRAD stock is going to gain from here.

As of this writing, Vince Martin has no positions in any securities mentioned. He may initiate a long position in SRAD this week.

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