Back in June, I identified Sportradar Group AG (NASDAQ:SRAD) as the most attractive name in an attractive market in an article on Seeking Alpha. Since then, there have been a number of positive developments for the sports betting market in general and the company in particular. The stock, however, trades almost 20 percent lower. In this follow-up, I will discuss recent developments and their impact on my thesis.
Regulatory Tailwinds
Recently, there have been significant developments for the sports betting industry on the regulatory front. The US Court of Appeals for the District of Columbia Circuit overturned a previous ruling blocking an online sports book operated by the Seminole tribe out of Florida in West Flagler v Haaland. The US Supreme Court subsequently denied an application for stay. The ruling does not open a floodgate for tribes in other states – which arguably would have been the best-case scenario for data providers (unlike for non-tribal sports books). But it surely has an impact on the sports betting market as a whole to open up a populous and sports-obsessed state like Florida, home to two NBA franchises, three NFL teams, and Lionel Messi’s new employer Inter Miami.
In Brazil, necessary regulation in order to legalize sports betting was implemented through a presidential provisional measure, with formal legislation already passing one of two chambers of parliament. Brazil is not only widely known to be a sports-crazed nation, it also is one of the world’s more populous ones with well over 200 million inhabitants. To be clear, sports gambling has already been happening there for quite some time. But a legal and regulated market increases the demand for integrity services and reliable data, both of which are exactly what Sportradar supplies.
New Contracts
Sportradar has secured a number of new key agreements and partnerships over the course of the last months. Among those, the new multi-year exclusive partnership with US Soccer is especially noteworthy. Football (known to Americans as “soccer”) is rapidly growing in popularity in the United States. While it is the number one sport almost anywhere else, it still has some room to catch up to the “four main food groups” (full disclosure: I borrowed this term from Bloomberg Radio host Michael Barr, whom you may have heard describing Hockey, American Football Basketball and Baseball by this moniker on the “Business of Sports“ show). Notably, Apple Inc. (AAPL) gained almost a million new Apple TV+ subscribers following the launch of its MLS season pass, underlining the growing interest. World champion and Ballon d’Or winner Lionel Messi’s move to Inter Miami probably played a significant role as well in that regard. While Sportradar’s partnership with US Soccer does not cover MLS, it still includes Messi: Inter Miami is a participant in the Lamar Hunt US Open Cup, which is covered by the agreement alongside US National teams and other US Soccer organized competitions.
The company furthermore secured a deal with CONMEBOL which will grant it exclusive global audio, video, and betting data rights. Those new deals come in addition to existing similar partnerships with the likes of FIFA, UEFA, and various national federations. Sportradar thus solidifies its leading position as a data provider in the global number-one sport.
At the same time, the company’s leading position in Basketball seems secure, too, given its decade-long exclusive contract with the NBA. Notably, NBA team owners Michael Jordan, Mark Cuban, and Theodore Leonsis are Sportradar shareholders, as is the league itself. The company also sealed a new and broadened agreement with Nascar.
Growth Remains Profitable
Sportradar continues to grow. And, crucially, unlike many of its competitors it does so profitably. Q3 revenue grew to €201 million (+12 percent YoY). While that figure is below the Q2 figure of €216 million, it is important to consider that multi-week summer breaks in most European football leagues fall within Q2 and the NBA regular season does not start until mid-October. Also, 2023 was a year without a UEFA European Championship or FIFA World Cup.
The company generated a net profit of €4.6 million during Q3. Adjusted EBITDA grew 38 percent YoY to €50.5 million. The adjusted EBITDA margin increased by about a quarter to 25 percent.
Net retention rate, albeit a little lower than during the previous quarter, remains at a more than decent level at 116 percent (Q2: 120 percent). One negative development is that the company had net debt of €306 million as of September 30th, after a net cash position back in March. However, liabilities decreased around 5.5 percent over the course of the quarter in absolute terms to now €596.5 million. Interest payments of €15 million were 11 percent lower compared to Q2 and 44 percent lower YoY, while interest received grew to €5 million from €0.73 million in Q2 (Q3 2022: €2.7 million).
Thesis Risk
Risk factors – with the exception of a prolonged blockage of the Florida market due to the initial ruling in West Flagler v. Haaland which seems off the table – remain largely unchanged, from my point of view. California and Texas have not yet legalized online sports betting. At least Texas will not do so before 2025, at the earliest, due to its system of biennial legislative sessions. And, obviously, the concept of gambling has not become more ESG-friendly since June, either. As stated before, I believe these risks to be manageable, but maintain that an informed investor should be aware of them.
Valuation and Conclusion
All in all, I maintain a bullish view of Sportradar. In fact, overall, I am emboldened by recent developments. Sure, not every aspect of the Q3 results was perfect. But overall, the company absolutely remains on track, in my opinion. The macro picture appears positive, too. The sector is growing and there are positive regulatory developments. As long as customers bet on the right fixtures and events, it does not matter whether the sportsbook is operated by DraftKings Inc. (DKNG), FanDuel (DUEL), or, for that matter, Benny the Bookie. I believe developments such as the recently formed partnership between PENN Entertainment, Inc. (PENN) and The Walt Disney Co.’s (DIS) ESPN to be of secondary importance. On top of that, Sportradar is set up to profit from its UEFA partnership next year. 2024 will not only see the introduction of a redesigned UEFA Champions League with more games (= more data to be generated and distributed). There will also be the European Championship in the summer.
Previously, my calculated target price was $22.7 to $24.5 per share on an undiluted basis. I based this assumption on an EV/revenue multiple of 6.5 to 7 and revenue towards the upper end of the company’s guidance at the time (up to €920 million).
However, the company cut its guidance to now €870 to €880 million. It also has €390 million higher net debt now. Using the same general method, I am therefore adjusting my medium-term target price to $19.3 to $21.1 per share. For a more detailed explanation of my methodology, I will allow myself to refer you to my previous article.
Given that the stock trades almost 20 percent lower than when I first covered it, I am, however, upgrading my previous buy rating to a strong buy. That may sound counterintuitive at first, but even on the lowered target price, the relative upside is now between 90 and 110 percent.
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