FANTINI’S FINANCE: Do Picks and Shovels Equate to Dollars and Cents?

In the gaming investment landscape, affiliates and data providers represent an interesting alternative to land-based operators, bookmakers and iGamers. Despite lagging performance of late, many of the biggest players in the space offer intriguing future prospects.

FANTINI’S FINANCE: Do Picks and Shovels Equate to  Dollars and Cents?

The old line goes that profits are made not from mining but from selling picks and shovels to miners.

As the stocks of online sports betting operators crashed in 2021, many investors turned to the equivalent of pick and shovel sellers—affiliates and data providers. Their reasoning: media affiliates would provide customers to operators at affordable costs and the data companies would thrive because everybody needs data—bookmakers, gamblers, even sports leagues and teams.

It hasn’t turned out well so far.

Among affiliates, Raketech and Group are down a third from their highs. Catena, at under 13 Swedish kroner, is less than a tenth of its 145 high of May 2018.

The data companies haven’t fared any better. Genius Sports is just a quarter of its high and Sportradar a third; both hit those highs in 2021 when online sports betting operators reached their manic peaks.

The exceptional performer has been the largest of them by market cap, affiliate Better Collective, whose stock scored to all-time highs earlier this year and has stayed near them.

Of course, the question isn’t where these stocks have been but where they are going. Interestingly, the affiliate rationale may be becoming sounder. As online sportsbooks try to slash marketing costs to gain profitability they still need new customers, especially in a world where many gamblers are loyal only to the day’s best promotion. As regulators and legislators worry about aggressive advertising and problem gambling, affiliates become a source of customers insulated from such controversy.

Of course, stock prices have fallen for a reason, and it’s not just because the online sports betting bubble burst.

Catena blamed a 28 percent third-quarter drop in revenue on the temporary effect of shifting to a revenue sharing model, especially in North America, where the Swedish company is making its big push. However, the number of new depositing customers plunged 34 percent; EBITDA fell 65 percent; and net profit went negative by two Euro cents a share.

Catena is strengthening its financial position by selling its Italian business as the company becomes increasingly U.S. focused. Group’s stock plunged 20 percent on the day after it announced third-quarter results even though revenue rose 19 percent overall and net profit doubled to 13 cents a share.

The company has some sell-side following in the U.S. with Jeffrey Stantial of Stifel, for example, rating it a buy with an $18 target. As of this writing, the stock price closed at $9.98 then dropped another 1.6 percent to $9.82 in after-hours trading.

Raketech, Stockholm-listed like Catena, reported big numbers with revenue growing 66 percent and EBITDA 16.5 percent. It appears to be genuinely inexpensive at nine times trailing earnings.

Better Collective might be the best of the lot. It is the biggest with a market cap around $1.3 billion. Despite its size, Better Collective is largely unknown to U.S. investors in part because of its European investor focus. Like many iGaming-related stocks, its primary listing is in Stockholm. Recently, it also listed in Copenhagen, which thrilled Better Collective’s Danish founders but did little to raise its profile in the biggest capital markets—the U.S. and U.K.

Better Collective grew third-quarter revenue 26 percent and EBITDA 35 percent despite undergoing the same shift in North America as Catena to a revenue share model. Further evidence of growth: New depositing customers soared 73 percent.

Better Collective has a simple strategic goal: to be the world’s leading digital sports publisher. In addition to being ambitious, that goal suggests a business less volatile than those responsive to the betting results of the latest major sports event.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.