Small cap stocks can be a great resource for generating new investment ideas. In this example, we take a look at Genius Sports Limited (GENI), a data provider of the top professional sports leagues to the sports betting industry, which is an under-followed, under-loved small-cap gem at an inflection point of accelerating revenue growth and significant margin improvement. Their recently released Bet Vision product strengthens their standing with the sportsbooks and can be transformative to in-play betting, where they are highly leveraged.
GENI was formed in 2015 by co-founder and current CEO Mark Locke. In September 2018, a UK-based private equity fund, Apax Partners, acquired a majority stake in Genius Sports and an additional $35 million to be invested in the business. The company went public through a SPAC, listing on the NYSE on April 21, 2021 with an Enterprise Value of $3.7 billion. On September 14, 2023, Apax sold 20 million shares in a secondary offering (through Goldman Sachs), reducing their holding to around 31 million shares roughly 15% of the company. Interestingly, during the last shareholder meeting, a share buyback was approved to repurchase 15% of the shares over the next 15months.
GENI’s core business model involves paying for rights fees from Tier 1 leagues or exchanging IP (“contra model”) for the rights to collect official professional sports leagues' data and then processing and licensing that data for bookmakers and related offerings. GENI quantifies each game it collects data on as an “event,” on average 200,000, of which roughly 70% are exclusive. Within each event, sportsbooks use thousands of data points that Genius generates to create betting lines on spread, money line, over/under, player props, etc. The events range from the 400 sports leagues the company monitors, from Tier 1 (leagues with global name recognition like the NFL) to Tier 2-4, which are regional leagues across various sports.
The majority of revenue, approximately 60% based on the S-1 filing, is derived from recurring revenue related to contractual minimum guarantees. Further, 70% of operating expenses are expected to grow slower than revenue. The upside levers come from increased GGR (Gross Gambling Revenue or what the sportsbooks take in after paying out winning tickets), new markets, and utilization of new events. The most profound lever would be related to the growth of in-play betting in the US, where GENI has a three times higher take rate than normal, but we will explore that in-depth later.
GENI won the highly coveted exclusive data deal with the National Football League on April 1, 2021. Initially, it was a 4-your exclusive deal for the rights to NFL data worldwide. The deal comprised a yearly cash payment of around $100 million and 18.5 million $0.01 equity warrants in GENI, which at the time of the deal equaled $133 million (based on a $15.63 share price at the time), making them an 8% shareholder. The cost of the warrants has been fully recognized as stock-based compensation within the COGS line during the vesting period. On July 6, 2023, the deal with the NFL extended through the2027-2028 NFL season. Given the NFL’s equity interest in GENI, it appears they are long-term strategic partners with mutual alignment.
GENI also extended its exclusive agreement with the EPL through the 2024-2025 season. The terms were not disclosed, but by observing Daloopa’s quarterly detailed guidance changes, we can glean that annual payments were in the $35 million annual level before the renewal, which was likely done at a modest premium.
GENI paid $130 million for all their data rights in 2022, including the NFL, EPL, Argentine football, etc. Data rights increase modestly to $172 million in 2024, but these will be spread over a much larger base as legalization broadens in the US and NFL rights worldwide.
GENI operates three business units: (1) Betting Technology, Content and Services, (2) Sports Technology and Services, and (3) Media Technology, Content and Services. The Betting Technology group provides the official data to the sportsbooks and accounts for 60-70% of overall revenue (see Daloopa data sheet below). Customer contracts are on a fixed license fee basis and/or a variable basis whereby a certain take rate(s) is applied to the sportsbook’s Net Gaming Revenue. The Sports Technology group recognizes data sales to the various sports leagues themselves. Lastly, the Media group provides marketing services to sportsbooks, leagues and other brands to acquire customers and promote their brands.
While still over 50% of revenue, down from nearly 80%, the European business operates at a 30% EBITDA margin. The European sports betting market is well-established with a long operational history and provides a model for the US market. Roughly 75% of wagers are made “in-play” after the match/game has started. While in Europe, the majority of revenue is derived on a fixed fee basis, in the Americas, there is a good amount of upside for GENI driving in-play bets as they are incentivized with a 5-6% take, roughly three times that of which they get on pre-match bets.
Legalized sports betting has only been rolled out to roughly half the US population within the last 5 years post PASPA’s repeal in 2018,with major states such as California, Texas, and Florida (limited with Hard Rock Bet the only operator live, who is a Genius customer) still waiting to participate fully. America’s betting composition is the opposite of Europe's, with only 25%being placed in-play. GENI’s Americas business is losing money on an EBITDA basis at a roughly negative low single-digit margin. But GENI’s America's growth continues strong, doubling in 2022 and growing 30%+ year over year in the last two quarters.
Note that most European sportsbook contracts are on a fixed-fee basis; while in-play data is critical, it is a component of the total contract. For the US sportsbooks, the vast majority have a variable rate attached to in-play betting, which GENI is incentivized to proliferate.
Second Spectrum was a key acquisition, announced in 2021 fora $200 million total purchase price. It provided them the platform to enter a complete data offering to the sportsbooks and leagues, as evidenced by the NFL's long-term deal. GENI continues to invest in R&D to scale the data business, adding key computer vision and AI functionality, allowing broadcasters such as Amazon Thursday Night Football to show real-time players’ speed, completion, or probability of a sack.
The release of Bet Vision has been met with resoundingly positive feedback from sportsbooks and bettors. Bettors can now watch a near real-time (1-2 second latency vs. 30 seconds for a “live broadcast”) view of the game on any mobile device and make wagers on a single screen without leaving the app. The product was released in late September to start the NFL season with 3 sportsbooks- Caesars, Bet Rivers and Fanatics. Soon thereafter, FanDuel, the market leader, signed a deal in November to use BetVision that was accretive to their regular contract. I would expect DraftKings and other sportsbooks to follow suit in the near future.
Bet Vision’s impact on live betting for these sportsbooks has been enormous. The last details provided by GENI indicate a 121% increase in in-play handles since week 1 with their 3 launch partners. Given the higher take rate of ~5%-6% with no incremental costs, expect BetVision to generate increased variable revenue that drops almost entirely to the bottom line.
Check out the Bet Vision product here.
GENI’s EBITDA margins are poised to continue their upward trajectory from the ~13% exiting 2023. CEO Mark Locke said on their Q3 earnings call that through internal investment and acquisition, GENI has the infrastructure and technology to “support significantly higher revenue.” On the earnings call, management repeatedly commented that 2024 is a highly predictable year with the NFL and EPL under agreement.
To model EBITDA, the company has stated that future revenue growth drops to the EBITDA line at 30-50%. Using conservative assumptions at the midpoint of that range and assuming 20% top-line growth, the stock trades at 15x and 10x ’24 and ’25 EBITDA.
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