Genius Sports Limited (NYSE:GENI) is a London-based provider of technology products and services to the sports, sports betting, and sport media industries globally. In other words, they offer sports leagues (such as the NBA or Premier League) the technology infrastructure for the collection, integration and distribution of live data that is essential to run the league’s operations.
GENI went public through a SPAC in 2021, and shares have massively underperformed since then. They reached an all-time high of $25 and then proceeded to crash ~92% all the way to just $2. However, shares bounced back a little bit and are now trading in the $6 range.
We believe GENI has the potential to be a great long-term compounder. It’s facing several tail-winds, growing revenue and profitability fast and trading at a fair valuation. We believe it is a great addition to any long-term portfolio.
GENI reported Q2 2023 financial results on August 7. Group revenue came in at $86.8 million, up 22% YoY and surpassing the company’s own estimates of $80 million. GENI has been surprising to the upside the last couple quarters, which is always nice to see. The largest contributor to revenue growth was the betting segment, growing 26.8% YoY just over the Media segment, which grew 22.4%.
In the quarter the company extended their strategic partnership with the NFL until 2027-28, where they remain the exclusive distributor of official live game data and Next Gen Stats to the global media and betting markets. They also extended data partnership with Football DataCo, the data rights holder of UK football, covering over 4,000 events per season across EPL, EFL and SPFL. The NFL and Premier League are two of the most important sports leagues in the world, and the fact that they extended their partnerships with GENI proves that they offer valuable solutions and technologies for them.
Adjusted EBITDA experienced an impressive 87% growth in the second quarter compared to the same period last year, soaring from $8.3 million to $15.6 million. This surge accounted for 18% of the total revenue, a notable increase from the 11.8% reported twelve months earlier. Despite this positive trajectory, the company remains in a loss-making position. The net income for the quarter stood at -$10.3 million, a contrast to the -$4.7 million reported in the corresponding quarter of the previous year.
Nonetheless, the situation is not as dire as it might appear at first glance. In the previous year, GENI recorded a gain of $30 million from foreign currency exchanges, which had a favorable impact on the net income. This year, the narrower loss can be attributed to a strategic reduction of 40% in the General and Administrative (G&A) expenses as compared to the second quarter of 2022. These efforts to curtail costs are considerably more sustainable in the long run compared to relying on gains from foreign currency fluctuations.
The company raised its guidance for 2023 again this quarter. They now expect revenue to come in at $410 million and EBITDA to reach $52 million in 2023. This is a 2.5% and 6% increase for revenue and EBITDA estimates, respectively. GENI is also maintaining its expectations to achieve positive free-cash flow generation in 2H 2023 and beyond.
The biggest opportunity ahead relies on the expansion to the US, which is the fastest growing region for GENI. Europe constitutes approximately 54% of the total revenue, the US contributes around 39%, and the Rest of the World makes up 10%.
In particular, the potential for growth lies within the sports betting business, driven by the ongoing trend of legalization that boosts revenue. It’s important to note that higher revenue doesn’t automatically translate to higher costs. The management is confident that a significant portion of the substantial investments required in the U.S. has already been completed. Looking ahead, one can anticipate that revenues will outpace operating expenses in the U.S.
Valuing this type of company is not easy because of their lack of earnings, but ultimately we believe a multiple comparison is the best way. Sportradar Group (NASDAQ:SRAD), the closest comparative to GENI, is currently trading at 3.3x EV/Sales and 18.5x EV/EBITDA. DraftKings (NASDAQ:DKNG), a sports betting business, trades at 3.5x EV/Sales and still has negative EBITDA. GENI, on the other hand, is trading at 3x EV/Sales and 24x EV/EBITDA (all forward-looking measures).
We think that the stock is trading at a fair valuation, although multiples could expand if growth accelerates and profitability ramps up.
GENI faces intensive competition in the industry. Given that all the services they provide are reliant on both exclusive and non-exclusive data sourced from sports organizations, should these collaborations come to an end, the company stands to lose the majority of their revenue. The company only has 1 customer that represents more than 10% of sales in 2022.
To sum up, we believe GENI checks all the boxes of a long-term compounder. The company is rapidly growing revenue, improving profitability and gaining and renewing contracts with customers. Moreover, it has several tail winds such as the exposure to the growing sports betting industry and fair valuation. Overall, we believe it’s a great addition to any long-term portfolio.