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written by reader GAN not growing

By anto55555, October 4, 2021

I haven’t seen an update on GAN in a while, so not sure Travis’s thoughts, but it hasn’t grown and is now rumored to be a takeover target. What are the thoughts of some holders about this company? Great company, but this far, a bad stock.

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Travis Johnson, Stock Gumshoe
Travis Johnson, Stock Gumshoe
October 5, 2021 9:53 am

No real news about the company in the past few weeks, but here’s an excerpt of what I wrote after their earnings in August, in case that helps to get the discussion going or focus your thinking in any way:

I’m not at all sure how this evolves for GAN, but there’s clearly a challenge in this year’s pivot to a new business model with the direct-to-consumer business from Coolbet adding retail sports betting in Northern Europe and South America as a major driver of revenue… making GAN much less of a SaaS business than it was when we first got interested a year and a half ago, and also more of an international business. 18 months ago when we first bought shares in GAN, it was a risky company because more than 40% of its revenue came from FanDuel, it didn’t have many customers, and it was trading based on a surge in revenue from New Jersey and Pennsylvania as those two pioneer states aggressively launched online sports betting… but it was also profitable, and was trading, right before it went public in the US, for something like 20X likely earnings.

Part of the problem is how you see this “mission creep” for an investment — is it a problem that they went from being a high-margin cloud software business to, after losing some of the business from FanDuel, being a slightly more capital intensive platform? Or is it a positive that they have built a platform and are continuing to add different businesses to it, diversify, and bring on more employees, hurting profitability but increasing the optionality for the future?

That’s a question from me, not an answer. My inclination is to hold, as I remain stubbornly attached to GAN and think the market is failing to see the growth opportunity that regional and tribal casinos represent, since we’re all obsessed with the biggest three or four players…and we’ll find out if that turns out to have been a mistake.

When I first bought shares, this was a high-growth but unpredictable business, and I thought it would be more predictable and stable, but that’s no longer true with all the shakeups among customers (FanDuel out, Twin Spires in), and with the addition of the direct-to-consumer Coolbet business. They had just finished a year in which gross operator revenue on their technology platform increased 171.5% year-over-year, from $116.3 million in 2018 to $315.8 million in 2019. That growth is continuing at a crazy rate, and the gross operator revenue that touches their B2B business should be about $1 billion this year, and they continue to have a good market share among tribal and regional casinos (really, among all the casinos that don’t insource their tech development and build their own platform).

The business is not as clean as it was 18 months ago, it’s not just scalping a little off the top of FanDuel’s booming New Jersey sportsbook and enjoying the marketing-driven scale that company achieved overnight, but it is still appealing — and they are trying to build it into something bigger and better, particularly with packaging their exclusive iGaming content as Super RGS and building their own Coolbet-driven GAN Sports platform to sell to casino operators, as well as the sportsbook kiosk that they’ll be introducing in October. In the near term, the driver will be Coolbet now, because that company is booming and has much higher revenue than the core B2B business, and also brings some interesting global diversification, but we should also see some meaningful growth in their B2B revenue this year as all of the Twin Spires operations and several Michigan casino operators run online betting through GAN’s platform, with new customer volume probably continuing to be driven by the NFL season. I still think that’s worth betting on, and I think the market is being too cautious in valuing these shares at just 4X 2021 sales, given the potential for much better margins as each state and customer scales up, but it could be that investor interest won’t pick up again until GAN begins posting real profits and solid profit growth (probably in 2023, though one never knows — before they ramped up their spending, I thought they would be nicely profitable in 2021).

GAN was supposed to have an investor event yesterday, loosely connected to the Gaming Expo going on right now in Vegas, but had to postpone because of quarantine for some executives… I don’t know what they were going to say, but whatever it was will have to wait probably a couple weeks, so there won’t be much new to chew on until they either reschedule that investor update or release their third quarter report (which will be mid-November).

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anto55555
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anto55555
October 5, 2021 3:08 pm
Reply to  Travis Johnson, Stock Gumshoe

Thank you. I’m still holding as well, but I think there will be a buyout before all this growth can come to fruition. Only time will tell.

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