Betting On Growth: Genius Sports Is A Buy Despite Current Unprofitability

seekingalpha09-28

Strong revenue growth, especially in the betting services segment, despite being unprofitable and facing a 52% YoY increase in operating expenses.I expect operating expenses to slow down over the next...

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Conservative investors should keep an eye out for a potential pullback.   Tom McAtee/iStock Editorial via Getty Images Genius Sports Limited (NYSE:GENI) continues to show signs of revenue growth, even though the company is still unprofitable. Since June this year, the share price increased by over 50%, despite missing EPS estimates in Q2 2024 by over 200%. In this article, I considered reviewing the recent financial performance of this company, including some of the pressures that the company is still facing, like the 52% YoY increase in operating expenses. I will provide the rationale behind my buy rating in the outlook section, including a review of their fundamentals over the past few years. I will also include a summary of the recent 13F filings, which show an increase in long positions during the past quarter. As always, I would like to start with a brief company overview section for those readers new to this stock. Company Overview Genius Sports is a company that helps sports leagues, betting companies, and media outlets with technology and data. Essentially, they collect live sports data during games and turn it into useful information to determine betting odds and to create digital content that fans see during broadcasts. The company operates in three main areas:  Betting services: this segment provides data and tools to help betting companies offer live odds. Media services: this segment is focused on helping media companies create engaging sports content and ads for fans. Sports services: in this segment, they offer sports leagues the technology to manage their events and operations.  I considered including below a breakdown of their revenue from their latest earnings report.   Period Betting Services (million USD) Media Services (million USD) Sports Services (million USD)   2024 H1 141.0 53.4 20.7   2023 H1 121.6 40.1 22.4   Click to enlarge Considering that the company operates globally, I included below a breakdown of the revenue per geographical area.   Year Europe Americas Rest of the World   2024 H1 113.7 88.1 13.3   2023 H1 107.8 66.6 9.7   Click to enlarge Ownership-wise, the latest 20-F shows an aggregate beneficial ownership across all 11 directors and executive officers of 11.6%. A decent amount, in my view. The CEO, Mark Locke, owns 8.9% of the common stock, which is a respectable amount of skin in the game.   SEC 20F Headwinds And Challenges Let's start dinner with dessert. Genius Sport is still not a profitable company. In Q2 2024, they reported a net loss of $21.8 million, more than double the loss in Q2 2023. A quick look at the income statement reveals the key driver behind this decline.   SEC 6-K As you can see above, operating expenses rose by 52% YoY, totaling $49.4 million during Q2 2024. This increase was mainly driven by increased sales and marketing expenses, which rose by 47% YoY, totaling $9.7 million. Additionally, general and admin expenses increased by 57% YoY, reaching $30.9 million during Q2 2024. On one hand, I am not overly concerned about this sharp increase in operating expenses, as the company has to grow before it becomes profitable. In Q2 2024, revenue increased by 10% YoY, mainly due to the betting services segment, which experienced the largest growth among all segments of 18% YoY. However, the media segment was relatively flat, and the sports segment declined by 11% YoY. Therefore, the sharp increase in operating expenses is justified for only 1 of the 3 operating segments. Nonetheless, this segment (betting services) is the main contributor to the total revenue (70%), so focusing on this segment might be a good strategy. R&D expenses increased by 24% YoY, mainly due to investments in technological innovations like the GeniusIQ platform. As a side note, this platform tracks players' movements in real time and provides live insights with stats on how likely they are to perform a certain action (shot, score, fault, etc). The main reason why I'm encouraged by this platform is that it will provide fans with advanced betting tools that provide a more data-driven experience. Moving on to other pressures, the CEO mentioned during the latest earnings call that the global sports data rights market is now duopolistic. If you are wondering who is the other competitor, it's Sportradar (SRAD). As a matter of fact, Sportradar previously engaged in legal battles with Genius over access to live data from English and Scottish football matches but eventually reached a settlement where it gained a sublicense to provide a delayed secondary feed. At the moment, Genius Sports has secured key partnerships with the English Premier League and NFL, however, in the long run, especially when these contracts will approach their renewal date, Sportradar is likely to challenge the exclusivity of these agreements, possibly leading to pricing pressures. Finally, a quick look at the valuation ratios shows that the company could be overvalued when compared to the median of the consumer discretionary sector. Price to sales (TTM) and price to book value seem to be significantly above this median, and also the company's average. However, when compared to Sportradar, the valuation ratios don't look that bad, especially price to book value, which is 22% below SRAD's ratio. Outlook A quick look at the daily chart below shows the share price slowly recovering from the 90% drop between the peak (June 21') just a few months after it went public, and the bottom on July 22'.   Trading View A quick look at the income statement shows a recovery in operating income, net income, and EBITDA since 2021, which seems to be in line with the trend of the chart above.   trading view Additionally, when we look at a quarterly time frame, despite the recent increase in operating expenses there seems to be an improvement since Q4 2023.   trading view When looking at their balance sheet, the total debt of the company is significantly less than the total cash & equivalents.   trading view However, their debt position could change in the future, considering that the company has a $90 million senior secured revolving credit facility with Citibank and Deutsche Bank. Additionally, the company recently amended this agreement, increasing the facility size to $120 million with an additional contribution from Goldman Sachs. Finally, the cash flow statement shows a recovery in free cash flows since 2021, with a TTM FCF of $5.38 million.   trading view In regard to the latest 13Fs and 13D/Gs, I considered including a table below with a summary of the second quarter.   whalewisdom I am encouraged by the 11% increase in all 13F filers and by the 52% increase in new positions during the last quarter. Additionally, management raised guidance for 2024, projecting a total revenue of $510 million and an adjusted EBITDA of $85 million. In other words, they expect 23% and 59% YoY growth, respectively. Therefore, despite the increase in operational expenses, and even though the company is still not profitable, the fundamentals back up a recovery from the decline in 2021-22. Additionally, the recent price action seems to be quite favorable, with a 60% increase since June this year, with a significant increase in 13F filers. Therefore, considering all these factors, and despite the risk of a pullback, I rate this stock as a Buy. Conclusion To wrap up, I believe Genius Sports has good potential for growth, despite facing some headwinds that are directly impacting their ability to generate profits. Management seems to have prioritized the largest segment, betting services, which experienced a significant increase in revenue YoY. In my view, this justifies their rising costs, even though their two other segments aren't doing as well. I am encouraged by their strong partnerships with the NFL and Premier League, and by the advancements in the GeniusIQ platform, which could attract new customers in the betting segment. To conclude, despite the company currently not being profitable, the fundamentals and the recent price action led to my Buy rating.  As an additional note to more conservative investors, I would recommend keeping an eye for a small pullback, if you want to optimize your entry point.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2470106400"}