Yesterday we looked into the first “Hidden SaaS” cloud software stock hinted at in the ads for Stansberry Venture Value, and today, as promised, we’re on to number two… there’s also a third one hinted at, but the clues are pretty sparse on that one (so no promises).
Let’s just jump right in — what are the clues for this second stock?
“Opportunity 2: Not on the NYSE
“The second SaaS opportunity Bryan is sharing today is a tiny company… with a market cap well under $500 million.
“And like the stock I just told you about… you won’t find it on any list of SaaS businesses.”
OK, so similar to yesterday’s stock in that the “cloud” SaaS part of the business is somewhat hidden. What else?
“This stock isn’t listed on the NYSE or NASDAQ.
“All I can tell you is this company makes the ‘back office’ software for an industry that’s spreading across America, state by state, because of big legal changes.”
OK, so it’s a pretty good chance that this is a “hot” sector — probably either marijuana or gambling. What else?
“A brand new industry that’s growing at a blistering pace. In one legal state, revenues shot up 60% last year alone.”
OK not super specific. Some more clues, please?
“… you don’t need to pick one state or one business that’s going to dominate the industry.
“Because almost all the biggest players use this one, tiny company’s software.
“They’re essentially ‘locked in.'”
OK, so that’s the appeal of cloud services — it’s hard to cancel something once it’s embedded in your workflow and you come to depend on it. Kind of similar to the appeal fo subscription newsletter services, come to think of it, so I can see why a newsletter publisher would find it particularly appealing.
“This stock is a secret to U.S. investors today, but it’s not difficult to buy if you know how.
“But Bryan predicts it could be listed on a major U.S. exchange soon.
“When that happens — the secret will be out. It will show up for Wall Street analysts and money managers rushing into SaaS. And billions of dollars could flow in.”
OK, so if you read between those lines it’s probably not an unlisted company or an OTC company… it’s just a company that is listed in some other country.
And, of course, there’s the usual sky-high promise:
“He thinks it could reach 1,000% gains… and become a juicy buyout target for a larger SaaS company.Are you getting our free Daily Update
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“Which could continue delivering big gains in the years beyond.”
We also get a little catnip for your friendly neighborhood Gumshoe…
“Please understand… it’s no accident that I’m leaving out a lot of details about these opportunities.
“They are the best ideas we’ve uncovered… within the best group… within the best stock strategy Porter has ever identified.
“That makes them probably the most valuable opportunities we’ve ever shared in the history of Stansberry Research.
“And I expect them to be the best performers in our company’s history.
“So of course we’re guarding the details very closely. It wouldn’t be fair to Stansberry Venture Value subscribers to give away details that could reveal their names.”
That’s exactly the kind of challenge that gets the Thinkolator chugging… so what do we find?
Well, we can’t be 100% certain… they did keep it pretty light on the detailed clues… but I’m pretty sure the Thinkolator came up with the right answer for us here: This is likely GAN (GAN in London, GMMNF for very illiquid trading OTC in the US).
GAN is a gaming software platform, headquartered in London but primarily focused on the US (they do have other businesses in Europe, mostly in Italy, but that’s stable and not really growing, the growth is all in the US) — here’s how they describe themselves:
“GAN is a leading business-to-business (‘B2B’) supplier of internet gambling software-as-a-service solutions (‘SaaS’) to the US land-based casino industry. The Company has developed a proprietary internet gambling enterprise software system, GameSTACK™, which it licenses principally to land-based US casino operators as a turnkey technology solution for regulated real-money internet gambling, encompassing internet gaming, internet sports gaming and virtual Simulated Gaming.
And the big driver recently is online sports gambling, which has been legalized in several states and has been growing fast (I didn’t see an exact 60% growth number, but GAN’s key markets in Pennsylvania and New Jersey, which were early legalization states that offer online sports gambling, have posted growth numbers in that range pretty consistently each month recently).
GAN was actually in a “strategic review” a year ago, trying to figure out how to extract value from the company and probably sell it, but they got a nice surge of business because of the rapid growth in sports gambling (their first half revenues last year were higher than the full year revenue for 2018), so they decided to pull out of that possible sale process and move forward with seeking a US listing to better “create value” for investors.
And that’s where we are right now — they have filed a registration statement with the SEC for a US listing (just a few weeks ago), and they pre-reported their full year 2019 numbers at the end of January and noted that they think they’ll be “ahead of market expectations” with revenue growth of at least 115% and a positive EBITDA margin (after losing money on that measure in the previous year). The big catalysts, they say, have been the higher-than-expected surge in NFL betting in New Jersey and Pennsylvania in this first legal betting season for the most-bet sport, and the cross-sell of online casino gaming to sports bettors in those states, but they’re also getting boosts as new states come online (Indiana in October, for example). This is CEO Dermot Smurfit’s quote from that press release:
“We are delighted with our full year performance in 2019, which proved the long-theorized margin opportunity available to GAN as a specialized enterprise software provider and provides a solid foundation for 2020 and beyond. Our intellectual property and technical expertise put us at the forefront of the Internet sports betting and casino gaming market as demonstrated by our diverse and expanding client base. Our recent new client announcements, continued focus on acquiring additional new clients and expectations for further real money Internet gambling legislation to pass in new States in the U.S. set the stage for 2020 to be yet another very exciting year.”
I don’t know what the competitive landscape looks like for software providers for casino gaming, I assume that the huge players (MGM, Wynn, etc.) don’t need them and that they are primarily working with smaller casinos who don’t have the massive technology systems and rewards programs that the multinational casino operators do, but that’s just a guess. They are growing very fast, and it’s also encouraging that their margins are exploding with that growth — in the first half of last year, they grew revenues by 145% but expenses only rose by about 30%, which is a huge positive and implies that they have some “flywheel” exposure that lets their revenue rise rapidly without them doing any extra work.
So that’s pretty encouraging, particularly as we see sports betting continue to expand across the US (I’m expecting sports betting to be overwhelmingly an online activity, though that could turn out to be wrong, and that means all the small land casinos who want to offer this betting, including Native American casinos, will need some kind of online platform to offer it) — but what does the valuation look like?
GAN’s shares have surged with the success of sports gaming and that big revenue surge in the US, so they are up from about 50 pence a year ago to about 160 pence now (they’ve come close to 200 a couple times in the wake of their strong year-end results and the excitement over the likely US listing, but fell sharply along with most other growth stocks in recent days). That gives them a market cap of about 150 million pounds, which is just under US$200 million.
They should have full-year revenue of about US$29 million, and they were “cash flow positive” for 2019, though I don’t know if they’re GAAP profitable at the moment. They have no debt, and I would expect that they will list new shares in the US and raise some money in connection with that hoped-for US listing to help them try to accelerate their growth in new US sports gambling markets, but they don’t really need cash at this point. The draft F-1 registration statement has been submitted to the SEC, but only confidentially at this point, so it’s not really filed and an offering might not come imminently (or at all, I suppose, if the SEC has concerns). We also can’t see what they’ve included in terms of updated numbers or possible sale of shares.
But the company certainly looks appealing at first glance. Not all of that revenue is really “recurring” revenue, a lot of it is the one-time setup costs of establishing systems for clients, and with the new clients last year that was a larger share of the total than it has usually been for GAN, but even just the recurring revenue is likely to be in the US$20 million range for 2019 and presumably growing rapidly in 2020, so we can think about comparing GAN to other cloud SaaS stocks on that price/sales basis to get an idea of the relative valuation… and they’re well under 10X trailing sales, which is very strong for 100%+ revenue growth, particularly because they’re already profitable or nearly profitable. Right now they’re trading at 10X recurring revenue, and you probably won’t find many, or maybe any, small and growing “cloud” stocks in the US at that valuation.
The uncertainty is that we don’t really know how sustainable that kind of growth is — will they keep signing new customers in new online gambling legalization states, and getting those startup and setup fees? Was their growth this year a fluke because they were ready to take market share, and maybe the big players will come in and take some of that business next year? I don’t know… the big acquisition spree from the former Paddy Power Betfair, now called Flutter (FLTR in London, PDYPY for the US ADR), probably should have scared little GAN and other small operators a bit, since they now own both The Stars Group (owner of the big online power PokerStars) and sports betting pioneer FanDuel, but it’s a fast-changing space and GAN and its casino customers probably don’t have to dominate for GAN to do really well in a rapidly growing market.
It will be interesting to see what they say when the F-1 becomes public and we get a better idea of what the outlook is for 2020 (they have given no guidance yet), and if the growth can continue at anywhere close to what they did last year then GAN is a pretty easy buy at 7X sales and 20X EBITDA. I’d be inclined to consider a position in GAN, but have not yet looked into the history or the competitive positioning enough to get really comfortable with the idea — the basic combination of rapidly growing industry, high recurring revenue, and high and growing margins is tough to argue with.
If you do decide to buy shares, do note that until they get a US listing, the US trading at GMMNF is likely to remain quite illiquid — you can probably still buy at a reasonable price if you monitor the trading in London and do your currency conversion, particularly if you place an order (limit orders only) while both NY and London markets are open (so, the first couple hours of the morning — London trading stops at 11:30am NY Time these days, though that shifts with daylight savings). I prefer to trade these kinds of stocks on their home exchange, which is easy with Interactive Brokers and some other brokers who offer London trading — often it’s not buying at a fair price that causes challenges for illiquid stocks, it’s selling, particularly if you ever want to sell in a hurry, but you can make your own call on that. Or just wait and see what the valuation is like when (if) they get a US listing.
I did mention that there was a third player teased by the Stansberry folks, and on that front the Thinkolator has so far come up dry… here are the clues for you if you’d like to hazard a guess:
“It’s a tiny firm supporting a huge segment of the cash-gushing commodity industry.
“Its clients are some of the biggest and most powerful companies in the world. And it’s backed by a software giant 100 times its size.
“This little company’s main product has no competitors. And with new products likely to come online in the next few years, its revenue could reach 20 times today’s levels relatively quickly.”
So with that, I’ll have to leave you once again to think for yourself — what’s your take on GAN, have any other favorite gambling or cloud stocks to suggest to your Gumshoe friends? See an exciting solution hiding in those clues for the third stock that has so far thwarted the Thinkolator? Let us know with a comment below… thanks for reading!