The US sports-betting markets are barely getting started as legislation unleashes what will be a very big industry. The state by state launches, once a licence is attained, have the same big picture in mind, but the early development stages require time and money.
PBH’s 1H22 revenue increased 84% to $139.1 million but incurred an EBITDA loss of $126.0 million as it goes full Monty into the US markets where it has targeted and won operating licences.
The timing of four major state launches within 3-4 months of each other is a very busy schedule and probably points to an EBITDA loss of similar magnitude in 2H22f. Launches in New York (January 2022) and Pennsylvania (February 2022) will add to the workload. PBH will be live in 11 North American states once Ontario launches in April 2022. There is line-of-sight into 18-19 states by the end of CY22.
We think FY22f will be the peak of such losses with a mild contraction in FY23f followed by a much smaller dent in FY24f and potentially profitability by FY25f.
An important facet to understand is the quality of PBH’s infrastructure and products. The Eilers & Krejcik review of sportsbetting apps ranks the PointsBet app 2nd of 34 apps (4Q21 testing) with a well-regarded suite of features. During the recent Super Bowl LVI, PBH offered the most in-play and game day markets and was able to place 99.9% of all bets within 1 second. PBH’s marketing partnerships with broadcaster NBC and the NFL are delivering in-game commercials featuring legendary NFL quarterback Drew Brees.
Investment view
We have reconsidered the heavy investment load PBH is carrying presently. The company’s $523 million cash balance (excluding player cash) is set to decrease to around $365 million by the end of
FY22/23f and this suggests a fresh equity injection in the order of $200 million early in FY24f might be warranted. Beyond that, free cashflow should be kicking in and ramping up quickly.
The company is still envisaging a North American addressable market of US$42 billion and US$18 billion in iGaming in 2033. We have kept our assumption of PBH achieving a 5% share of an estimated US$35 billion market by 2030.
The share price is validating the Australian market only and virtually dismissing the potential of the North American market opportunity.
We understand the high risk assessment likely to be attributed to PBH at this early stage of development in North America, but the share price is clearly ignoring the potential reward. This is unbalanced, in our view, and is the reason we maintain our Buy recommendation.
Risks to investment view
The development of the North American sports-betting markets is highly competitive and subject to new legislation on a state-by-state basis. Consumer demand for sports-betting may not reach the levels anticipated.
Recommendation
We have retained our Buy recommendation.
