Sports gambling has been around for ages. For decades, people who enjoyed betting typically flocked to brick-and-mortar casinos to place their wagers. While casinos still very much exist, the last few years have witnessed a boom in sports wagering, largely thanks to the rise in mobile betting.
Mobile sports betting is chiefly dominated by DraftKings, FanDuel, and Penn Entertainment. Additionally, smaller players are seeing a rise in popularity as larger betting companies look to consolidate assets. For example, PointsBet's U.S. business was recently acquired by the privately held sports entertainment company Fanatics in a heated contest that included rival DraftKings.
Another smaller player, Genius Sports Limited (GENI 5.49%), recently saw its stock pop by 25%, propelling it to a new 52-week high. Despite this run-up, Genius Sports looks really tempting at its current valuation. Let's dive in and analyze the company's growth catalysts and assess if now is a good time to buy.
What makes the company different?
Generally speaking, betting companies like DraftKings, FanDuel, and Penn Entertainment, among others, compete for the same customers. While each company may offer some unique features, the primary reason to choose one sportsbook over the other is to analyze which app offers the most favorable odds.
This is where Genius Sports comes in. Betting companies and casinos employ sophisticated data models to determine their odds. Genius Sports is not a sportsbook or betting app. Rather, the company is a data and technology company that leverages machine learning to provide sportsbooks with an added edge. But what does this mean?
Genius partners with professional leagues such as the NFL, MLB, PGA Tour, and NCAA, among others, allowing the company to distribute its data discoveries to sports books and casinos. According to the company's website, Genius covers 240,000 sports events across a multitude of different professional leagues. In so doing, Genius is able to collect and synthesize loads of data points. From here, the company's team of statisticians and data scientists develop scenario models that can, theoretically, predict the outcomes of certain events.
Of course, there will always be anomalies in sports. However, Genius' findings must hold some merit given the fact that major sports leagues around the globe are partnering with the company. Furthermore, Genius actually sells its data to companies, including DraftKings and FanDuel. If you have ever used sports betting apps, you have noticed that the odds are constantly changing as the game progresses in real time. On an app like DraftKings, this is Genius' data going to work.
Wall Street is bullish
Genius Sports went public through a special purpose acquisition company (SPAC) in April 2021. Shortly thereafter, Ark Invest CEO Cathie Wood began scooping up shares. Wood is notorious for investing billions in growth stocks, particularly technology companies that are not yet profitable. She typically builds positions over time and spreads these stocks across a number of her exchange-traded funds (ETFs).
Ark Invest currently holds 5.3 million shares of Genius stock. In mid-March, Wood began to acquire more shares of Genius on a regular basis. But interestingly, on July 5, Wood purchased roughly 225,000 shares of Genius stock. The next day, the stock exploded 25% higher after Genius disclosed it had renewed its partnership with the NFL, but more on that below. In an effort to mitigate any theories around this coincidence, it is important to note that Wood continued dollar-cost averaging into Genius stock throughout its prolonged price decline from about $20 per share in November 2021 to roughly $4 per share in April of this year.
Nonetheless, a nod of approval from Cathie Wood should be taken as a victory for the stock's bulls. In another encouraging sign, following the sizable purchase from Wood, Ryan Sigdahl, a research analyst at Craig-Hallum, issued a note to investors reiterating his "Buy" rating and increasing his price target from $10 per share to $12, implying over 60% upside from current trading levels. Moreover, the consensus target on the stock is roughly $11.
Both the Wood purchase and the note from Craig-Hallum come on the heels of some significant news from Genius. In the last two weeks alone, the company has extended its partnerships with Football DataCo and the NFL. Moreover, the company will continue to work with the NFL through the 2027-28 season and "will remain the NFL's exclusive distributor of real-time, official play-by-play statistics, proprietary Next Gen Stats (NGS) data and the NFL's official sports betting data feed to media companies and sports betting operators globally."
In addition, Genius will remain the exclusive provider of live data feeds from the English Premier League, English Football League, and Scottish Professional Football League.
What does valuation imply?
Genius Sports has a market capitalization of $1.5 billion. Per its first-quarter 2023 financials, the company is not yet profitable although its net losses are shrinking -- from $40 million in Q1 2022 to $25 million in Q1 2023 -- which is a positive sign. Genius was able to cut some of these net losses by generating higher revenue growth than initially anticipated.
The companys Q1 2023 revenue of $97 million came in above its initial guidance of $92 million, and management subsequently raised its full-year guidance to $400 million from $391 million previously. The company is clearly bullish on its ability to grow its top line by expanding and further penetrating partnerships, which it's already proven it can do.
However, given the lack of profitability, valuation metrics such as price-to-earnings (P/E) are not useful for this stock. A different metric to look at is the price-to-sales (P/S) ratio. Genius Sports currently trades at 3.4 times its trailing-12-month sales. To put this into perspective, DraftKings trades for a multiple of 4.5, while Penn Entertainment only trades at 0.6.
When it comes to risk factors, investors should keep in mind that sports betting is still in its early innings. It is not legal nationwide, therefore its total serviceable market is still developing. Even so, the old adage -- "When everybody is digging for gold, it's good to be in the pick-and-shovel business" -- really applies here. Although the sports betting landscape is filled with competition, Genius Sports sits right at the nucleus, powering some of the largest players in the game.