Avoid Genius Sports Stock: Company Bets on High Risk, High Reward Strategy

As states legalize online sports betting, more and more sports betting companies aim to go public. Above, Travis Kelce, No.87 of the Kansas City Chiefs is tackled by Tremaine Edmunds, No.49, of the Buffalo Bills during the AFC Championship game in January.

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Nearly 20 states have legalized online sports betting, with more to come. The buses are covered with advertisements for the sports betting operators FanDuel and

DraftKings.

Investors have valued DraftKings (ticker: DKNG) at $ 30 billion, or 30 times its revenue, in recent months.

No wonder other sports betting companies are aiming to go public. Since

Engineering sports

(GENI) merged with a SPAC and listed on the New York Stock Exchange in April, its stock rose to $ 25, valuing it at $ 5.4 billion, 20 times this year’s expected earnings, before returning recently at $ 19, while some investors reconsider high-risk, high-return strategy.

Genius gathers the game data required by bookmakers – not just final scores, but live tally of first downs made, free throws sunk, serves broken and cricket wickets fallen. Quick and accurate reports on in-game developments are as important to the sports betting industry as exchange data feeds are to Wall Street traders, as nearly 70% of betting income comes from today. in-game bets, sometimes referred to as “proposition bets”. or “micro-bets”. Will a player hit a home run the next time they are at bat? You can bet on it.

Two companies dominate the business: Genius, based in London, and its much larger rival Sportradar, a private Swiss company reportedly preparing its own IPO registration. The two clash fiercely. To prevail over Sportrader and justify the hopes of its stock market fans, Genius is betting on concluding agreements with sports leagues to become their exclusive official data supplier. The success or failure of this strategy is likely to seal the fate of its actions and all actions listed by Sportradar.

Historically, in-game stats were compiled by data scouts sitting in the stands with cordless phones, or pulled from TV streams, without any official league sanction. “Frankly, we never believed this was a sustainable business model,” said Mark Locke, CEO of Genius. Barron. “So we started to create a portfolio of official rights. “

So far, Genius is not profitable. Out of $ 150 million in revenue in 2020, it recorded an operating loss of $ 21 million. Ignoring non-cash charges, its adjusted earnings before interest, taxes, depreciation and amortization were $ 17.5 million.

Just before it was released to the public, Genius backed its bet on official data, with a six-year deal to be the National Football League’s exclusive game data partner. Analysts and industry sources say Genius has agreed to pay the NFL $ 120 million a year – half in cash, half in stock warrants – for the right to collect the statistics it sells to bookmakers. That sounds like a heavy load, given consensus predictions that Genius is expected to generate $ 250 million in revenue this year and $ 330 million next year.

CFO Nick Taylor has said Genius and the NFL have agreed not to release details, but notes that Genius has said they expect their NFL deal to break even this year, on a cash basis. , and be profitable thereafter.

Genius hopes bookmakers pay him a higher “stake” – a slice of gross gaming revenue for his customers – than today’s 2.7% for his official NFL news, plus an additional fee for services such as digital advertising. “Our business is built on leverage,” says Locke, CEO of Genius.

The company’s plan could receive a cold reception, says a veteran of major sports betting operations. “There’s going to be a tipping point where the sports betting operators can’t afford to pay the cost of the rights, and the NFL is the test case,” he said.

Responding to such concerns, Genius CEO Locke said, “There is a narrative that you don’t need to associate with the sport. It’s absurd. We are on the right side of history.

In 2019, Genius became the official distributor of betting information for English and Scottish football, including the English Premier League, the most valuable betting property on the planet. Genius tried to demand a participation rate above the historical norm of 1.5% to 2%. That demand was well over 10%, says the sports betting veteran. Genius was rather satisfied with a fixed amount closer to its historic catch rate, explains the bookmaker. Genius Taylor’s chief financial officer said his company was content with a flat rate when it was a private company.

Needham analyst Bernie Mcternan has a buy rating and a target of $ 28 on Genius stock, saying the data provider can increase its take rate to 4% of the industry’s growing revenue. sport bets. A 5% rate and faster industry growth could send the stock to $ 70, he predicts, while not getting more than the current 2.7% would drop it to $ 7.

Locke calls 5% very achievable.

What seems certain is that the sports data game will only intensify. Last year, Genius and English football officials began to eject Sportradar data scouts from Premier League matches. The companies are suing in the UK, with Genius accusing Sportradar data collectors of trespassing and Sportradar accusing Genius of antitrust violations. Each denies the other’s claims.

Write to Bill Alpert at william.alpert@barrons.com


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