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What’s Whitney Tilson’s “Netstake” All About? Thinkolator answers about the “Netflix of Sports Betting”

What's being teased by Empire Elite Growth?

By Travis Johnson, Stock Gumshoe, December 13, 2021


Here’s a little lead-in to the ad we started to see rolling on Friday from Empire Elite Growth ($5,000/yr, no refunds “on sale” for $2,000):

“This the first page of a 49-page document officially released in the same year that President Trump promised “a new American moment.”

“The document struck down a federal law, which Supreme Court Chief Justice Samuel Alito called ‘unconstitutional’ and ‘unfair.'”

This is one of the few times that Trump gets name-dropped in a teaser ad when there’s actually some relevance — this latest teaser pitch from Whitney Tilson is all about sports betting, and Donald Trump used to own a big casino in Atlantic City and was reportedly in favor of broader gambling legalization before he ran for President… though his administration was on the losing side of that Supreme Court decision — The Supreme Court in 2018 finally struck down the 1992 federal law (the Professional and Amateur Sport Protection Act, or PASPA) that made sports betting outside Nevada illegal, largely because, as New Jersey argued for decades, it was obviously unfair. The Feds had steadfastly fought against expanded gambling legazliation, it wasn’t just the Trump administration or previous anti-gambling conservatives — Obama’s administration had done the same thing previously, with both effectively siding with the professional sports leagues and the NCAA, who opposed gambling at that time.

OK, fine, not a lot of relevance — but at least some. Teaser writers know that name-dropping Trump (or Hilary Clinton, or practically any other politician who inspires a visceral response among their readers) is a good way to get your attention.

So anyway, yes, the federal ban on sports gambling was ended by the Supreme Court about three and a half years ago, and New Jersey was first out of the gate to fully legalize in -person and online sports betting, no surprise. It was a huge hit, and since then about half the states have followed suit, some faster off the starting line than others, legalizing sports betting to some degree (almost every state has different rules and policies, and some attached the gambling licenses to pre-existing legal casinos while others just opened up the online gates to the highest bidders).

So what’s this Tilson pitch about? Here’s the intro to the ad:

“The legend who invested in Netflix (before it exploded) just discovered a little-known company that’s using the Netflix blueprint to help create America’s next big obsession

“To see how you can take advantage of a shocking $516 billion wealth exodus… read below”

That’s a reference to Whitney Tilson timing a Netflix (NFLX) trade almost perfectly, almost a decade ago now — I was at one of his conferences when he made the turn from going short on Netflix to buying shares, so that’s true. He didn’t hold for the exceptional returns you would have today, which I’m sure he regrets, but he did make a good call at the time. Whether that makes him a “legend” or not is your call to make — personally, I like his writing and analysis but have also watched him make plenty of bad stock calls over the years, so I try to go in with an open mind.

The presentation with John Pierce and Whitney Tilson is staged as an “interview,” as is so common these days, and Pierce starts by laying out Tilson’s pretty public history as an investor (he has been on 60 Minutes twice, first during the mortgage crisis then when he highlighted product problems at Lumber Liquidators, and was often on CNBC for a while).

The stock recommendation here, however, is apparently actually coming not from Tilson, but from his colleague Enrique Abeyta, who runs Empire Elite Growth. I’m not sure why it’s Tilson doing the spiel here instead of Abeyta, but I guess it’s just that he’s much better known. Abeyta has been Tilson’s partner at Empire since they launched that platform in partnership with Stansberry a few years ago, and he tends to be the “aggressive growth” stock picker. We’ve looked at a few of his ideas over the years, including the “Robinhood of Crypto” that he continues to pitch (that’s one of the “free special reports” tacked on as sweeteners for this particular offer, too).

So… some kind of stock that has to do with sports gambling, pitched by Enrique Abeyta… what clues do we get?

Here’s a bit of the spiel from the order form:

“People who invested in Netflix when the movie streaming industry was on the verge of taking off of have seen gains of more than 58,000%….

“A similar situation is playing out again.

“One industry insider told Forbes, “There’s no other market in the world as exciting and full of potential. It’s a once-in-a-lifetime opportunity.”

“And the biggest chunk of this opportunity rests with one small company that’s on the verge of dominating the entire industry.

“Just like Netflix did with streaming movies.”

And Tilson says…

“Having looked at the business model of little-known company very closely, it’s clear to me that it is modeling itself on Netflix, which was one of the most successful investments in my career.”

OK, so what other clues do we get?

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“Americans also spend 40 hours on Amazon… 87 hours on Facebook… and over 500 hours a year using Apple products.

“That’s a lot – but it pales in comparison to the 612 hours a year they spend on Netflix!

“And now, the small-cap company Enrique is so excited about today, is planning to do just the same.

“It has a huge head start, too, as it already has access to 50 hours from every American, each year.

“That’s already more attention than Amazon gets.”

That’s an interesting statistic… 50 hours per American, per year. What might that mean, “access to 50 hours?” There are about 335 million Americans right now, so if we’re talking an average that would mean this platform or service has something like 16 billion hours of usage. if we’re talking numbers from actual users, 50 hours a year is not so much, but if it’s every American that number gets huge. Maybe it’s just a reference to the amount of time the average person spends watching sports? Those kinds of statistics aren’t very available or reliable, but we’ll leave it there.

What else does Tilson tell us about this company? He calls out the number of states they’re working with…

“9 of the 29 states have already signed on with this company thanks to its proprietary technology…

“A technology that has the capability of bringing this money-making opportunity straight into the homes of millions of Americans.”

And which other countries they are involved with as well…

“And just like Netflix did, this company is moving into other countries as well – Canada, Latin America, UK, Bulgaria, Israel, Norway, Sweden, Iceland…”

And it’s somehow specifically tied to sports, and to online betting…

“More than 150 million Americans watch sports on TV.

“That’s more than double the number of Netflix subscriptions in the US and Canada combined.

“But while Netflix streams movies…

“This company will bring the excitement of sports plus the adrenaline rush of gambling in casinos, into people’s homes.

“That’s why I dubbed this company ‘NETSTAKE.’

“Right now, it’s still under $15, but I believe that won’t last long.”

And a bit of hype for you…

“That said, this stock doesn’t have to rise 60,000% for people to make a lot of money. I believe it could easily go up 400% or 500% in the next couple of years. And Enrique is even more bullish – he thinks it could eventually turn into a 1,000% winner.”

OK, so part of the rationale is that this is a play on sports betting, and this company is apparently doing something that inspires connections to Netflix… and part is just that sports betting is growing so fast, with that likely to continue. Here’s more from Tilson:

“… every state that does not have legal sports betting is now sharing at least one border with a state that does.

“Just like New York, these other states will lose hundreds of millions of dollars in potential tax revenues to their neighboring states….

“By the time the rollout is done, almost every American will live in a state with legalized gambling.”

And, of course, gambling is going online and remote and mobile, just like everything else, with a big push from the pandemic to speed up that rate of adoption…

“According to the Wall Street Journal, in some in-person casinos business dropped a devastating 97% during the worst of the COVID-19 pandemic.

“But of course, gambling never stopped…

“It just moved online.

“All those billions of dollars suddenly shifted to the internet.

“And if you ask me, most of it is not going back…

“You see, people love online convenience… in every aspect of their lives.

“They don’t want to go back to the office.

“They want to order food online.

“Some people may never even set foot in a grocery store again.”

And their technology is somehow unique and patented in this area…

“… that is exactly what “NETSTAKE” is doing: taking full advantage of streaming and internet technologies….

“Also, ‘NETSTAKE’s’ technology is patented.

“Recently a competitor tried deliver the same service using ‘NETSTAKE’s’ technology and ‘NETSTAKE’ took them to court.

“Thanks to its patent… ‘NETSTAKE’ literally has the field to itself.

“Any land-based casino can use ‘NETSTAKE’ to put up an online storefront and manage the entire technology back end. And now, as more states open their doors to blockchain, it will take full advantage of this technology too.”

OK, so that means this is a company that can provide the technology that runs an online casino for land-based casino operators, and they’re active in nine states, have some connection to remote sport betting, what else?

The stock has had big surges before:

“‘NETSTAKE’ has the potential, we believe, to double in a couple of months.

“In fact, earlier this year it doubled in less than two months.”

OK, so that narrows it down a little bit. Other clues?

“113 U.S. casinos have already signed up with ‘NETSTAKE’ to build online gaming platforms.

“Here are just a few of them….”

And he shows images of Churchill Downs, the MGM Grand, Wynn and Planet Hollywood casinos in Las Vegas, Texas Station, and the Red Rock Casino, among a few others.

So… enough? Sort of. The most likely solution here, sez the Thinkolator, is GAN Ltd. (GAN), a stock that I’m sure many of you have heard of — I own shares, and it has been both a darling and a disappointing laggard in the (almost) two years it has been listed in the US.

GAN is both a business to business (B2B) and business to consumer (B2C) company. Their B2B business is the foundation and was the reason I originally bought shares, they have a technology stack that lets casinos quickly go online with online player accounts, integrated with existing customer accounts, and connect with various sportsbook and iGaming content providers. Their biggest customer now is Churchill Downs, which has a growing online casino business in half a dozen states, but they boomed early on because they ran the sportsbook, player accounts and iGaming for FanDuel… and they crashed back down in late 2020, in part, because they lost some of that FanDuel business (they still have a contract for some of it, primarily iGaming).

The B2C business they acquired earlier this year, that’s the Coolbet sports gambling company — they offer online sports betting primarily in Northern Europe and Latin America, but GAN’s plan is to bring Coolbet’s sportsbook platform to US customers as a B2B business as well, and they have a lead customer in Station Casinos who will roll it out next year. Coolbet had a huge growth year, so now accounts for well over half of GAN’s revenue.

Why do I say “sort of?” Because although GAN is the best match, it doesn’t match all the clues. GAN is the only company I know of that does have contracts with most of those casinos shown in the tease, including their key provider deals with Churchill Downs and the Station casinos, and their multistate partnership with Wynn Interactive as well as their (much smaller) patent licensing agreement with MGM (GAN’s patent is on matching online gambling accounts to casinos’ land-based player accounts, a key marketing objective — and they have defended that patent in court), but I’m not aware of any connection they have to Planet Hollywood (which is one of the Caesars properties).

And they are active in all of the specific countries mentioned, including Bulgaria and Israel. Not many gambling operations are active in Bulgaria, Israel, Canada and Latin America, along with nine US states, so that’s another solid match… though Bulgaria and Israel only match because GAN has offices for product development and support in those countries, not sales.

GAN has partnerships with US casinos who control 94 properties, they say, but I can’t match that 113 number in the ad. Maybe we can stretch that number by including international properties, or those with whom they just have a licensing deal for their key player account patent, but I don’t see them claiming 113 anywhere. And they are licensed in nine states, as teased, but currently only operate in eight of them.

And when it comes to one of the specific clues, GAN shares have not doubled this year, as teased… though technically, they did double once within the past year, since they had a strong run from December of last year into February. And while they are below $15, they’re currently way below — they were at $15 a month ago, and perhaps that’s when the research was put together for this pitch, but the stock has now fallen further, it’s currently below $9.

If you want “doubled this year” and more of a presence in living rooms, the logical match is FuboTV (FUBO)… but FUBO, which is a sports-focused live TV streaming company (competing with YouTubeTV, Hulu Live, etc.), is just barely beginning to build a presence in sports betting and it certainly doesn’t run sportsbooks or online gambling operations for lots of land-based casinos right now — that’s maybe a more conceptually appealing match for this Netflix idea, but it’s not really a match for any of the other specific clues.

And if you want “doubled this year” and having some connection to nine states (though I think it’s 11 now), with some outsourcing of online operations for land-based casinos, that would point you toward Rush Street Interactive (RSI), which is similar in some ways to GAN but doesn’t have that exposure to Iceland, Sweden and Norway, or the connections with all of those specific land-based casinos shown. That’s the second-closest match, I suppose, particularly given that the shares are still in the mid-teens… and Rush Street Interactive arguably sells itself better as a streaming-type play, given their high average revenue per user and their focus on in-game betting (you can see some comments on that from RSI’s participation in a Milken Institute conference on streaming).

Every sports betting company talks about in-game betting, because that’s far more profitable than traditional sports betting (the odds are far worse if you’re betting on who scores the next touchdown than they are if you’re betting on who wins the game), but RSI arguably talks that game better than GAN does. I don’t know if they actually do a better job of it, but that’s where the money and engagement are likely to be in the future.

Could it be somebody else? Sure. There aren’t any that match the clues that I can locate, and the Thinkolator has thrown up its hands in exasperation at the idea of being asked to dig deeper on a Monday morning, but anything is possible… I’m just comfortable saying GAN is the best match, and it’s a stock that Abeyta has been connected to in the past for one of his trading newsletters… and that first came to our attention when it was teased by a different Stansberry-connected newsletter in early 2020, so he certainly is familiar with the name.

Will GAN recover from here? I’ve been perhaps too patient with this one, and I don’t understand the level of pessimism that traders have about GAN given their pretty solid progress and the rapid growth of the Coolbet product, so I may be too optimistic, as a stubborn person who owned the shares as they went from $6 to $30 and then back down.

For a little perspective, here’s what I wrote about GAN after their last earnings call…

I’m still just holding with some degree of stubborn patience — I didn’t expect Coolbet to become such a big part of the business, with its B2C business in Europe and Latin America booming, and the lingering effect of losing most of FanDuel’s business is still there on the B2B side, but both of those engines of the company are still growing. The risk of companies insourcing technology platforms is still there, and they will likely lose some business with some customers as that happens over time, but they’re also a reliable player with a history of safe and solid operations across many states with different regulations, and most casinos, particularly the smaller or regional casino operators who are some of their core customers, like Churchill Downs and now Station Casinos and the many Native American casino operators, will not be buying or building their own technology stacks. I clearly do not have a handle on where GAN’s share price should go in the short term, and I’m not throwing more money at it currently, but I still like the company’s prospects and think they’re being undervalued… unless management is just lying, which has, of course happened from time to time.

And then a week or so ago, in response to a reader question:

GAN has had a slog of a year as a stock… but I’m not particularly worried about the company, which I think has some solid avenues for growth — this is one I’ve been quite wrong about over the past year and a half, as it became a little too popular and got inflated and then had some disappointing results in their B2B business (providing back-office support for US online gambling) and had to rely on a surging B2C business (Coolbet, primarily in South America and Scandinavia) that investors don’t like as much, but the operating business appears to me to be doing pretty well. Plenty of folks disagree with me on that.

Anything new? A little bit. They entered the Canadian market this week, announcing a deal with an unnamed “top three” US iGaming and sports betting company to deploy on the GAN platform once Ontario’s online betting market opens, which is expected to be sometime early next year. That’s good news, given the large size of that market, but we don’t know much about the financial impact just yet. GAN says they had to disclose it because of their need to get regulatory approval and coordinate with third party suppliers, but the brand name operator has opted not to reveal itself, presumably they’re waiting to get a license first. There are lots of ways to measure “top three,” so it could be essentially anyone with a meaningful presence in the US, including existing GAN partners like Wynn, Twin Spires, Penn National or FanDuel, or one of a half-dozen others. More business is good, entering another potentially large market is good, but we’ll reserve judgement on how good.

The board finally stepped in when the share price dipped below $10 this week, for the first time since their initial US listing almost two years ago, and authorized a stock buyback. It’s pretty much just window dressing, intended to provide investors with some confidence — GAN doesn’t have all that much spare cash on hand, and the buyback authorization is only for $5 million, but they seem to be hoping it will slow down the pessimism train. We’ll see. They added some insider buying to that as well, which usually helps to inspire some confidence (CEO Dermot Smurfit has gradually been selling some of the shares he has earned through stock options, he’s the largest owner in the C-suite, but a couple others have been buying shares recently in the open market — not enough to shout it to the hilltops, but a little insider buying is nice to see).

Part of the issue with GAN is that it was “overpromised” by a lot of pundits in mid-2020 as the one-stop solution for casinos who want to go online — and while they have some limited patents and some unique offerings, that’s obviously not true, there are dozens of technology companies who act as suppliers to casinos, and GAN wins some contracts and loses others. Presumably that’s why GAN felt the need to acquire Coolbet, so they could offer a full platform including the sports book (previously, a customer would have had to buy the Sportsbook itself from someone else, like Sweden’s Kambi or others), but it’s also likely true that this business model shift, with the business quickly swamped by the huge surge of Latin American and Northern European consumer gambling dollars, turned some investors off.

The actual business of running a sportsbook is not as profitable as the business of selling software as a subscription, though that may change as more of those in-game bets grow in popularity. The take rate, the percent of the wager that the sportsbook effectively earns as their revenue, used to be only about 5%, much worse than other parts of the casino, and sportsbooks were often run almost as loss leaders to get Vegas conventioneers in the door — that rate is climbing quickly with more in-game bets, particularly online, and nutty prop bets, but many companies, including GAN, still make more money from the online slot games that sports bettors also play than they do from the sports bets themselves. Which, on the positive side, is part of the reason why GAN has been building up their content on the online slots side, buying control of a lot of popular brands that gamblers are familiar with from the casino floor (so I guess that’s kind of a Netflix comparable, they’re buying online gambling content “libraries” to get more customers — in this case, casinos, to sign up to their platform).

The other challenge is that their investment in growth has pushed back their anticipated profitability, so although it is a solidly profitable B2B SaaS provider in some ways, with a revenue share of gaming win that gives them some scalability, they’re spending so heavily on building capacity for new clients and buying content (including online slot games) and turning Coolbet into GAN Sports that they’re unlikely to show a profit for a couple years. Right now, the shares are valued at about 3X sales, with revenue growth after this Coolbet boom year expected to be in the 30% neighborhood — though we should be careful with expectations, since there are only a couple analysts making guesses. You can see the company’s optimistic take on its positioning, and their plans for the future, in their Investor Day presentation from mid-October.

And with that, dear friends, I’ll leave you to your cogitating — think I’m crazy to stick with GAN? Have a better idea for what Abeyta is flogging as his gambling play here? Let us know with a comment below… sorry for the lack of certainty this time out, but if you’ve got some additional wisdom to share I’d be delighted to hear it. Thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of Amazon and GAN. I will not trade in any stock covered for at least three days, per Stock Gumshoe’s trading rules.

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Pietro
Member
Pietro
December 13, 2021 4:19 pm

The only appropriate comment to Tilson’s career is an old European saying:
One who knows how to do , does it.
One who cannot do it, teaches it.
Better let him enjoy trips around the world.

dagobert.hartmann
dagobert.hartmann
December 13, 2021 4:22 pm
Reply to  Pietro

good quote ….

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dagobert.hartmann
dagobert.hartmann
December 13, 2021 4:21 pm

there is a new sports betting ETF from Roundhill with the ticker BETZ, maybe thats the safer bet on that topic, but probably not 1000x

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jrussel18
jrussel18
December 13, 2021 4:29 pm

BYD for the win

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clark30
clark30
December 13, 2021 4:30 pm

GAN seems to be the victim of over-promising. Not by the company so much but by the huckster class.

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michaelkparis
michaelkparis
December 13, 2021 4:38 pm

Not a match on all fronts, though Bragg Gaming Group (BRAG – Nasdaq) is an interesting one.

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dadpunchers
dadpunchers
December 13, 2021 4:40 pm

Not sports betting related, but Evolution (EVO on Nordic nasdaq and EVVTY is the US ADR) seems like a closer fit to “Netflix for gambling” with stronger competitive advantages and high margin, fast growing and profitable revenue that can scale easily.

Price has been crushed recently over a sketchy short report about aggregators offering their software to casinos working in unregulated markets.

Working on 100% rev growth, 118% operating profit growth and 60+% operating margins! Currently trades around 35 PE. Looooong runway in the US assuming NJ doesn’t take away their license.

https://static1.squarespace.com/static/5aaacb57506fbe4636414126/t/5f18432cb7db824f460a0f76/1595425581495/EVO+competitive+advantages+vF.pdf

Here’s a writeup by Alta Fox from summer 2020 if anyone is interested.

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tiger5
tiger5
December 14, 2021 4:15 pm
Reply to  dadpunchers

Evolution is the 800# gorilla in this space. This is the play in online gambling legalization imo….

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2578
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dagobert.hartmann
dagobert.hartmann
December 13, 2021 4:44 pm

Empire is a partner of Stansberry. GAN was introduced in Venture Value in October 2019, together with PAR and OSS as three SAAS plays, at that time GAN was still listed at the London Stock Exchange, there was a lot of hype from Stanberry before the stock was listed at Nasdaq, probably through the recommendations the very tinny stock skyrocket and than fall down heavily.

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lutz limo
lutz limo
December 13, 2021 11:21 pm

I have over 30,000 emails in my in box from Tillson and the others like him. In fact I can’t even figure out which ones I paid for. So now I read your news letter and when I find something interesting then I check it out. So far you and the readers have been pretty right on. I don’t have a big bank roll but enjoy the action. I have learned to be more patient after losing out in Penn and selling too early, which by the way was my nephews tip. When I do find something I am interested it seems you and the readers have it covered. Thanks

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kbldog
Guest
kbldog
December 14, 2021 2:54 pm

Travis, thanks for entertaining me while you educate! So much more fun…

drdavidepstein
drdavidepstein
December 18, 2021 1:53 pm

What about the new IBET at $14?

carl e baylis
carl e baylis
December 31, 2021 11:14 pm

it (GAN) sounds good to me

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stockbaby504
stockbaby504
January 28, 2022 11:39 am

Hi, has anyone figured this one out? Thank you!

rich
Guest
rich
March 12, 2022 1:41 pm

Did I miss something or did you not give NETSAKE stock symbol

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