Pointsbet: a new investment

US sports betting is a rare greenfield opportunity

For background, sports betting was made legal in the United States in May 2018, (more accurately, the Supreme Court declared this a decision for the states) and New Jersey legalised sports betting shortly after in June 2018.

Pointsbet launched in the state in January this year, and by 30 June had taken over 5% of the market. Already operational in Australia, the firm has built their own tech stack and manages risk in house.

This is a rare legislation-induced greenfield opportunity. Estimates of US sports betting are difficult. Data is hard to find and the legal market will likely be larger than the black market. Pointsbet pegs the opportunity at $17 billion, though some estimates are as high as $150 billion.

Pointsbet has built relationships with a number of racetracks and casinos, generally signing 10-20 year deals. These deals are symbiotic, as each venue is incentivised to market the brand and increase membership, and in once case, the licensee became a shareholder. In these deals Pointsbet owns the customer and all the data.

For the year to 30 June 2018, the firm only recorded about $25 million of revenue. Sports betting is competitive. Gross margins are high, but net margins are low, as there’s intense competition over incentives, and little loyalty from members. As is generally the case in the equity market, if this investment goes wrong it will be due to enemy action.

So why are we so excited? 

in July and August this year, Pointsbet posted over 240% year-on-year growth over the similar period the prior year. Needless to say, achieving that throughout the year would be quite an achievement – and dramatically ahead of broker estimates.

When looking at stocks like this, we play close attention to margin. We care less where it is, and far more about where it is going. The best investment returns often come from bridging the gap between an unprofitable but viable and fast-growing business, and that same business in cashflow rich maturity.

In Pointsbet’s year-to-date update covering July and most of August, margins increased substantially with the >240% revenue increase.

As per usual, we use alternative third party data to test our hypothesis.

July and August posted excellent performance. Can this be confirmed, and what has happened since? Google trend traffic in the United States has doubled:

In New Jersey, in less than six months to 30 June this year, Pointsbet took 5.4% market share. Search traffic has doubled since then.

This is almost entirely due to one state:

This data isn’t perfect, but imagine what they can do as they roll out state by state across the United States, and the map above lights up blue. After Iowa and New York (pending state regulation), Pointsbet has partner licenses in 7 states.

And that doesn’t include the potential contribution from giant states like California. There is a long runway here.

Other sources of data match up with the thesis. Online sports betting in New Jersey has grown 10x from August 2018 to August 2019, albeit off a small base. New Jersey also releases monthly data by license, so we can follow this monthly. It’s quite possible that Pointsbet loses market share and still grows substantially. If after a period of rapid growth the industry consolidates, Pointsbet would be a natural beneficiary.

And this is an area where Australians have expertise. Pointsbet’s CEO Sam Swanell was head of risk at William Hill, the President of Product and Technology was CTO of Aristocrat Leisure, the VP of strategy was the US BDM for William Hill, and the COO was head of IT and product at Pokerstars and tomwaterhouse.com.

There aren’t any large funds on the register, but Penn National Gaming, owns 5%. This is a helpful alignment, as Pointsbet has a 20 year agreement to operate under Penn’s license in Ohio, Indiana, Missouri, West Virginia and Louisiana.

The Chairman Brett Patton and co-founder Nick Fahey were buying shares after the last result, and so were we.

In summary, the scale of the opportunity here is way out of whack with its current market cap of ~$550 million, even after the >50% increase in price over the past few weeks. You could do worse than place a bet here.

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