Rush Street Interactive's U.S. And LATAM Growth Prospects Stand Great

seekingalpha11-20 22:06

Rush Street Interactive has grown rapidly with further market penetration in the US and LATAM, and the launch of a poker platform, adding immense long-term growth potential.The industry has tough ...

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(NYSE:RSI) operates online casinos and sportsbooks with a presence in the United States, Canada, and in Latin America. The company's operates under the BetRivers, PlaySugarHouse, and RushBet brands. In addition, Rush Street also operates sportsbooks in several land-based casinos. With the legalization of online iGaming and sportsbooks throughout the United States, and subsequent industry growth, Rush Street has managed to grow the company's revenues incredibly well with potential markets in Latin America adding further potential on top. The company has also managed to scale toward profitability with scaling revenues and improving customer acquisition costs. After investor excitement throughout 2021 and 2022 after a SPAC merger, Rush Street's stock crashed due to weak profitability. With continued revenue growth and an improving bottom line, though, the stock has again picked up traction with a 141% return in the past year with Rush Street's immense earnings growth potential. Stock Chart (Seeking Alpha) Rush Street's Growth Prospects Stand Fantastic Rush Street has grown its revenues incredibly rapidly - from 2018 to trailing revenues as of Q3/2024, the revenue CAGR stands at 95.7%. The growth has remained rapid despite a growing scale of revenues, including an accelerated Q3 year-on-year revenue growth of 36.6%. Author's Calculation Using TIKR Data The growth prospects remain good beyond Q3 - Rush Street raised its 2024 revenue guidance with the Q3 report to a mid-point growth of 31.7%, and the growth has several tailwinds enabling continued growth for upcoming years: Rush Street is still relatively unpenetrated through the growing US market with only 5 of 20 domestic iCasino state market opportunities currently live, and with 15 of 21 potential sports betting states currently live, adding to new domestic market opportunities. The total US online gambling market itself is expected to have a fast 9.8% CAGR from 2024 to 2029, on top of which the potential for new state entries adds growth potential for Rush Street. In Q3, combined US & Canadian monthly active users grew 28% year-on-year. Also, Rush Street's international presence adds to the company's long-term growth opportunities in Latin America. In Q3, the Latin America market only made up 19.4% of total revenues with Rush Street's presence currently only in Colombia, Mexico, and Peru in the region. Monthly active users in the Latin America market grew 122% year-on-year in Q3. On top of the rapidly scaling already established Latin America markets, the company has further market opportunities in countries such as Brazil, Argentina, Chile, and Ecuador with the Brazilian market expected to grow at an especially rapid 15.4% CAGR from 2024 to 2029 - even on top of the US potential, Rush Street has immense potential for further market penetration. Even further, the company launched its proprietary poker platform at the end of October with an initial launch in Pennsylvania, adding another valuable revenue avenue. The poker platform already has an established marketing strategy through the Poker Night in America series on YouTube, making the offering's potential significant. Given the domestic and Latin America revenue potential, the total revenue runway for Rush Street remains fantastic. The company has already represented the ability to capture its share of the industry's growth, making for great future prospects. The Competition Stands Tough, But Rush Street Has Maintained Market Share While Rush Street has managed to grow very well, the competitive landscape in online casinos and sportsbooks is challenging - brands such as DraftKings (DKNG), Flutter Entertainment's (FLUT) FanDuel brand, and BetMGM have established themselves as clear market leaders by gross gaming revenue, with the three leaders holding an estimated combined 71.4% share of iGaming GGR as of September 2024. So far, despite the notable competition, Rush Street has managed to gain traction and has maintained its US market share in 2024 so far despite the notable competition. The company ranks 4th in US market share at an approximate 8.2% level. Rush Street did previously lose market share from 2021 through to late 2023, but has stabilized the brand positioning in 2024 with successful customer acquisition efforts - the company has successfully marketed BetRivers through YouTube channels such as Mike Francesa's podcast, the Poker Night in America channel, and Betting Weekly Studios, garnering attention with very efficient marketing spending. In Q3, for example, Rush Street spent 16.9% of its revenues on marketing, comparing to DraftKings' dramatically higher 31.0% despite both companies scaling revenues at a near similar rate. The efficient marketing and maintained market share also speak for good growth going forward. While the larger competitors could still take share from Rush Street due to greater efficiencies from scale, Rush Street's marketing efforts and new market potential look to sustain good growth and a fair market share. Rush Street Continues Scaling into Good Profitability Previously, weak profitability weighed on Rush Street, but the company's scaling revenues and improving customer acquisition economics have now pushed profitability positive - the operating margin was first positive in Q1/2024, and has now scaled to a still relatively low 2.8% margin in Q3. Behind the increase, while Rush Street has scaled revenues, competition in customer acquisition has gone down in the industry in the past couple of years. Rush Street's total marketing spend has decreased from $220.5 million in 2022 into $160.7 million in 2023 despite a growing number of monthly active users, and DraftKings and Flutter Entertainment have shown similar trends after very aggressive marketing in previous years. The company has also clearly benefited from overall operating leverage. Author's Calculation Using TIKR Data While the margin level remains low for now, I believe that Rush Street's margin potential stands great with market maturation. For example, prior to the company's rapid FanDuel investments, Flutter Entertainment achieved an average 14.2% operating margin from 2014 to 2019 with its presence in mature markets. As Rush Street continues to generate revenues from its older customers while adding new customers, the company is also poised to continue expanding its margin level. RSI Q3 Investor Presentation Both DraftKings and Flutter Entertainment have shown similar trends in profitability, but Rush Street's profitability is still well ahead of DraftKings' trailing -9.8% operating margin due to the more efficient marketing spend. With Rush Street's already positive earnings and great growth prospects, the company is poised to expand its margins to a great level. The RSI Stock Valuation Already Expects Rapid Growth I built a discounted cash flow (DCF) model to estimate a fair value for the RSI stock. With Rush Street's great market potential, I estimate a 12.6% revenue CAGR from 2023 to 2033 with 3.0% perpetual growth afterward. I expect the growth to be more rapid in the near future with the most potential for new market entries, with a gradual slowdown to more moderate growth. For the EBIT margin, I estimate constant scaling into an eventual 14.2% level. The level represents Flutter Entertainment's long-term margin level average in the company's mature markets, which Rush Street seems poised to achieve with revenue maturation. The company has a fantastic cash flow conversion due to relatively low capital expenditures and a low need for working capital. DCF Model (Author's Calculation) The estimates put Rush Street's fair value estimate at $12.74, 13% above the stock price at the time of writing - after the stock has rallied in the past year, I estimate the stock to have a moderate remaining undervaluation. I still believe that as the market already prices in very successful future growth, investors are better off waiting for better stock prices for an entry as the current margin of safety is quite small. CAPM The DCF model uses a weighted average cost of capital of 10.27%. The used WACC is derived from a capital asset pricing model: CAPM (Author's Calculation) I estimate no debt from Rush Street as the company has a very strong balance sheet, including $220.9 million of net cash. To estimate the cost of equity, I use the 10-year bond yield of 4.34% as the risk-free rate. The equity risk premium of 4.11% is Professor Aswath Damodaran's estimate for the US, updated in July. For the beta, I used an estimate of 0.98, the same figure as I used as my beta estimate in my DraftKings article for the competitor. With an ESG addon of 1.5% and a liquidity premium of 0.4%, the cost of equity and WACC both stand at 10.27%. Takeaway With the potential for new markets in the United States and in Latin America, adjacent offerings such as the proprietary poker platform launch, and with overall growth in online gambling in several of the company's markets, Rush Street is poised to grow rapidly. The growth potential has also been highlighted by great historical growth, continuing at a very strong level in Q3. While notable competition exists, Rush Street has managed to maintain market share with efficient marketing spending that includes several YouTube channels to funnel customers. As profitability continues to scale along revenues with the potential for good margins, the company's earnings outlook stands great.  Given the share's rally in the past year, I only estimate a very moderate remaining undervaluation, representing a small margin of safety. As such, I suggest to wait for a better stock price for an entry and initiate Rush Street Interactive at a Hold rating.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","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":"4.29.2","shortVersion":"4.29.2","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/2484711234"}