The Motley Fool in recent weeks has been ramping up their teaser pitches on the weekend over the past few weeks, sending quite a few questions our way — most of these have been pitches for their higher-end portfolio services like the various Extreme Opportunities services, and that’s also what has caught our eye this week.
The pitch doesn’t have a person’s name attached this time, and I’m not sure who runs this portfolio at the Fool, but what they’re advertising is a new service called Extreme Opportunities: Future of Entertainment ($1,300/yr, no refunds), and they say that they’re launching this with a focus on their top entertainment-related ideas, including both established “foundation” leaders (they say there are seven of those) and what they say are 13 exciting growth ideas…
“We’ve pinpointed 13 stocks that are pure plays into some of the most exciting growth areas across all of entertainment. These stocks include streaming plays, online video, advanced technology plays, and much more!”
And while they don’t talk about the seven “foundation” names much (I would guess that list would very likely include names like Disney (DIS), Netflix (NFLX), Roku (ROKU), Alphabet (GOOG), Activision Blizzard (ATVI) and Tencent (TCEHY)), they do hint at two of those smaller “pure play” ideas in the teaser pitch — the headliner is a gambling stock, here’s how they hint at it in the email ad I received over the weekend:
“RECENT IPO TARGETS 827X POTENTIAL GROWTH….
“Whether it’s daytrading or gambling, a LOT of people are looking for ways to make a quick buck online.
“That’s fueling some pretty impressive growth in the online gambling industry.
“(In fact, some experts are predicting that the online gambling market could be worth $127 billion in just a few years!)
“Well, the team at Extreme Opportunities: Future of Entertainment have uncovered a stock that I see as a pretty exciting ‘pure play in this rapid-growth market that IPO’d just last year.”
What clues do we get about this one?
“… it’s tiny. $907 million market cap, to be precise….
“… targeting 827x potential business growth. Management estimates that this stock’s total addressable market could grow to $30.6 billion. By contrast, this stock brought in just $37 million in revenue in the last year. A potential total addressable market that’s estimated at 827x the size of the current business? …
“Never recommended at The Motley Fool before.”
And this is still technically not “recommended,” I guess — they pitch it as hugely exciting with that 827X potential growth, but also say that it is just a “radar stock,” something they’re watching but haven’t formally recommended yet (and might never). And they do imply that this is risky, because “this is an early-stage, aggressive company.”
So what’s the story? Well, you’d have go back all the way to last Wednesday morning to find it at a $907 million market cap, but the Thinkolator confirms this is our old favorite GAN ltd. (GAN), the gambling technology company. And yes, as further confirmation, GAN’s investor presentation does estimate their “Total addressable market at maturity” as being $30.6 billion (roughly 40% B2B iGaming, their most profitable business, and 60% B2B Sports Gambling, fueled largely by their acquisition of Coolbet).
That’s Gross Operator Revenue, NOT GAN’s forecasted potential revenue or the size of their potential market — you can think of Gross Operator Revenue as being the total amount of betting that’s happening through the platforms run by GAN’s customers, touching GAN’s account management system or their sports betting platform or whatever other parts of the technology stack that client uses (kind of like Gross Merchandise Volume for Shopify’s customers/vendors, for example). The total revenue that actually comes onto GAN’s income statement is far smaller than the Gross Operator Revenue of its clients — so for the first three quarters of 2020 GAN’s clients had Gross Operator Revenue of $413 million, very strong growth from $195 million in the same period of 2019… but GAN’s actual revenue, if you exclude a 2019 patent payment they received, was up about 65% from $15.3 million a year ago to $26.3 million in 2020. Still good, but the total addressable market for a gaming technology company like this is not “all the money people are going to gamble” — it’s the fraction of that amount that casinos who want to outsource player account management, online games, or sports book management will spend on technology.
The business is scalable to a large degree, they do get the most meaningful portion of their revenue from a revenue share on real money iGaming and a smaller portion from a sports gambling revenue share with some clients, but there’s also some real lumpiness — both revenue from and costs associated with ramping up technical support for new clients and rolling out new services can bounce around a bit… this year the big event so far is the Michigan launch, the latest big state addition to full online internet gambling and sports betting, with the first legal bets taken about two weeks ago with three different GAN clients as operators.
It’s still a small company, and losing or gaining a client or a state still has a meaningful impact on the revenues in any given year, but it’s important to be aware that the potential market for GAN is a fractional revenue share of the potential market for online gambling in general.
So get that idea of 827X growth out of your head right now, please.
It’s OK, we can wait a minute.
Adjusted yet? OK, we can proceed…
I really like GAN, and have added to my holdings a couple times since I first bought shares a little while after it was teased as a gambling “hidden SaaS” name by one of the Stansberry newsletters, a tease which started about a year ago (and has been updated and revised and relaunched, they were teasing it again in mid-January and I posted an update look at those stocks here). Shares surged when they shifted their listing from London to New York (that’s the “IPO last year” bit), then surged further when Dave Portnoy fell in love with them and they got some day trader excitement flowing over the summer, in the wake of bigger name-brand gambling stocks like DraftKings (DKNG) and Penn National (PENN), and then crashed back down a bit when everyone freaked out about losing part of FanDuel’s business (though that was neither a surprise nor a real crisis), so it’s been a wild year… and GAN has now grown to become a meaningful position for me, so I do watch it pretty closely. This is part of what I wrote to the Irregulars a couple weeks ago, when Michigan was just about to (finally) go live:
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“I’ve mentioned several times that Michigan is going to be the next big indicator for the growth of sports betting and the impact on revenues for GAN ltd. (GAN), our gambling technology provider, and they did post a press release today highlighting the official launch, finally, of online gambling in the State today. That’s not really a big news item, this has been expected for a while, but GAN did include some estimates for the market that will be interesting to track:
‘According to Regulus Partners and Macquarie Research, the state of Michigan is expected to generate $439 million in Gross Operator Revenue during the balance of 2021, increasing to $724 million in 2022 and $969 million in 2023.’
“Again, the projected scale should come as no surprise because we know Michigan has an established gambling economy, and they instituted relatively low state taxes on par with New Jersey’s to spur growth, and because there are nine online casinos ready to launch on day one, most with strong brand names and plenty of marketing capital (and three of them using GAN systems). That data is also in GAN’s presentation to the Needham Growth Conference, the slides for which are now available.
“We don’t know what the market share will look like among all the competitors in that market, but those are big numbers — not quite on par with New Jersey, which is likely to remain the largest online gambling market in the US for years, and may close in on a billion dollars in gross operator revenue, but certainly dramatic. GAN’s customers had a total of $315 million in gross operator revenue in 2019, almost entirely from Pennsylvania and New Jersey (and dominated by FanDuel, the early leader in both of those states)… and that turned into $30 million in revenue for GAN for that year, which gives you some idea of the general share of gambling revenue that GAN earns as a technology provider.
“GAN will likely end 2020 with pro forma revenue of roughly $60 million (if you pretend that they owned Coolbet for the full year), so if Michigan online casinos do hit that $439 million in gross operator revenue this year, and GAN’s partners/customers take a third of that ($146 million), then perhaps GAN’s revenue in 2021 could see growth of about $12-15 million from their operations in the state — which would mean more than 20% growth in revenue for GAN just from the addition of Michigan. Other states are also opening up, and their biggest markets in New Jersey and Pennsylvania are still also growing year over year (and transitioning TwinSpires’ business to GAN in those markets), so I expect the overall growth number to be higher than that, but it’s a pretty easy foundation on which to build your guesses — analysts are at $86 million on average, for GAN 2021 revenue estimates, and while I think that’s probably a little conservative that would mean roughly 40% revenue growth for a profitable company that trades at roughly 10X expected 2021 revenues and probably about 100X 2021 earnings. That’s not cheap in any objective way, for sure, but compared to a lot of other high-growth software providers it is very reasonable… and the market grows every year as more states legalize online gambling and sports betting.”
I guess everyone agreed that was a bit conservative, because the revenue estimate has bumped up again now — forecasts are for $99 million in revenue for 2021 at this point, and after a little pop yesterday the stock at $30 or so now has a valuation of just over $1 billion. GAN is not as cheap as it has sometimes been, and it is not, of course, the only technology solution for casinos that are looking to build online gambling businesses… but it growing strongly and steadily, it is profitable and scalable, and it is among a relatively small number of technology providers that have the technology, experience and regulatory approvals to pretty quickly launch an online gaming business, especially for the local or regional casino brands who do not have a large technology business or partnership yet, and I expect that we’re all underestimating just how quickly gambling legalization is going to spread as social acceptance accelerates and states begin to realize how much of a budget hole they’re trying to fill post-COVID.
And the second stock they tease in this ad is an advertising name…
“… one of our favorite recommendations is a tiny company with a MASSIVE opportunity in front of it…but is still small enough to slip underneath Wall Street’s radar!
“For some perspective, it’s about 1/50th the size of Netflix…
“And specializes in connected television advertising. Now, as we noted earlier, a past Motley Fool recommendation in this space was The Trade Desk, and after being recommended in early 2017, that stock has already soared 2,393%! ….
“However, this stock we’ve identified as one of our 13 pure plays is significantly smaller than The Trade Desk now is today. What’s most impressive is that its most important business line has been growing at over 100% rates!”
Netflix has a market cap of about $240 billion, so if you’re “1/50th” of that you’re looking at a market cap somewhere in the sub-$5 billion range. And that means this one is very likely a stock that had a massive pop on Friday, Magnite (MGNI).
Magnite is indeed often hinted at as a “next Trade Desk” kind of idea, and has been pitched by a few newsletters over the past year or two, particularly after it merged with Telaria to really focus more on providing a sell-side advertising platform for “connected TV” (ads in streaming services, mostly, like you might see on Peacock, Roku or Hulu). And on Friday, they went further down this path by agreeing to buy SpotX, another video ad platform, for $1.2 billion, which sent Magnite soaring another 20%. They’ve also been a Motley Fool recommendation for a while, so unlike GAN this is not a “new to the Fool” idea.
Magnite is still smaller than The Trade Desk (TTD), by a lot, but has become much more substantial… MGNI now has a market cap of about $6.5 billion, it’s not quite profitable but is expected to pass that “break even” point this year with about 270 million in revenue (without SpotX), so it’s trading at a pretty familiar valuation to anyone who has been looking at growth stocks lately — roughly 25X sales, a now kind of “normal” valuation that everyone would have laughed off as absurd five years ago. The SpotX acquisition is being made with half cash, half stock, and they report that SpotX revenue in 2020 was $116 million, so the acquisition goes through at roughly 10X trailing sales.
They also pre-announced some of their preliminary 2020 results, which showed very strong growth and emphasized how the SpotX deal will increase their overall exposure to connected TV advertising (Magnite is a broader ad platform, with roughly 20% of revenues coming from connected TV, SpotX gets more than half of their revenue from connected TV).
What’s the future for Magnite? It’s certainly in a sweet spot as far as the investor story goes, they’re in the hot digital advertising market, and they’re a platform with meaningful exposure to the very fast-growing business of ad-supported streaming. They are not really a Trade Desk competitor directly, The Trade Desk’s customers are primarily ad agencies and large ad buyers, while Magnite sees its customers more as ad sellers degree (TTD is on the buy side, and sells software and data about ads, close to half of their revenue comes from the big three ad agencies… Magnite is on the sell side, and sells the ads on its platform of publisher and partner inventory). Software and data sales are a better business because the margins are a little higher, but there’s also a lot of overlap and still a lot of evolution happening in this business.
And The Trade Desk is also, though it’s a great company and has been a tremendous growth story for a long time, a little more ludicrous in the valuation department — it has a market cap of $40 billion, and trades at more than 50X trailing sales (almost 40X expected 2021 sales). I’ve owned The Trade Desk since 2017 (I started buying it around the time the Motley Fool began teasing the stock), and I really like the company and their potential, and their consistent profitability, but I can’t tell you that it’s easy to swallow a valuation of 150X earnings, even with steady 25%+ growth (and I’ve taken profits on about a third of my position over the past year).
So although I don’t own Magnite, and I think the valuation is pretty nutty, I should admit that I still own TTD, which has an even nuttier valuation… and the connected TV advertising business is growing so fast, and taking so much of the advertising market away from traditional network TV advertising, that it might still work out for most of the players involved. A huge and fast-growing business, combined with a very fast-growing company trying to take market share, can work out even if you overpay for the company — it’s just that you have to be ready to accept that you’ll have to be patient, and it will probably be volatile, and sometimes these high-growth companies just plain fail so you have to diversify. If you’re a growth investor, most of your gains will come from the 20-30% of your investments that do outlandishly well, making up for the fact that most of your investments will probably disappoint (except for last year, of course, when it seemed almost every growth or tech “story stock” was a huge winner).
That’s part of the reason I haven’t delved further into this sector, though I do like the strong underlying growth — I already have large stakes in Roku, The Trade Desk and Alphabet, and all of them are significantly driven by video advertising, so adding Magnite or AcuityAds (AT.TO, ACUIF), both of which have some “what’s next” appeal, haven’t fit with my needs (AcuityAds has been pitched by some other Motley Fool folks as a kind of “baby Trade Desk”).
Maybe they’ll fit with your needs and your portfolio, though with nosebleed valuations everywhere we look in the market these days it can certainly be tough to place big bets on stocks that have just had 20% pops higher in a day or two like MGNI (or AcuityAds, for that matter)… so while a big surge like that might be a vote of confidence from other investors in the future for these stocks, and popular stocks tend to stay popular, I certainly don’t have any idea whether the next 20% move will be up or down (“average up” would be one of the key strategies of the Motley Fool’s growth guru David Gardner, putting more money into the stocks that are telling you they’re the best, but he’s got a stronger stomach than many of us).
I know there are plenty of folks out there in Gumshoedom who own all of these stocks I’ve mentioned today, so if you’ve got an opinion to share I’m sure we’d all be delighted to hear it — just leave your thoughts in the happy little comment box below. Thanks for reading!
Disclosure: Of the companies mentioned above, I own shares of and/or call options on The Trade Desk, Netflix, Activision Blizzard, NVIDIA, Unity Software, Alphabet, Twitter, GAN and Roku. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.