Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
For US investors, investing in the growing online gambling industry is easier said than done. The fact is, online gambling isn't legal in the US, so there just aren't that many domestic investment options. In fact, most of the major players in gambling are also diversified into other businesses.
For instance, Caesars Entertainment (CZR) owns and operates an online gambling business. However, buying CZR means you're also investing in things like showgirls and golf courses. Then there's a company like International Game Technology (IGT), which develops casino-style games for online (and land-based) markets. However, IGT is more like a software company than a gaming company.
An actual, pure play, online gaming company is quite a bit more elusive. Even harder to find is an online gaming company operating in an underserved market, such as Ireland (more on that below). That's precisely why I believe SeanieMac (OTCQB:BETS) has so much to offer as an investment.
The Online Gambling Market
According to SeanieMac, annual revenues from global online gambling are currently $32 billion, with potential to grow to $46 billion by the end of 2015. The largest segment of online gambling is sports betting, comprising 41% of the overall market value. The company also states that the online gambling market has grown by an annual average of 23% since 2003.
In Ireland, online gambling reached $1.7 billion in 2011 - 5% of the global market. Meanwhile, Ireland makes up only 0.6% of the world's population. That statistic helps support the popular notion that Irish adults like to gamble. (SeanieMac says one in three Irish adults bets $65 per week on average.) Finally, if the current trends hold up, the Irish online gambling market is expected to grow to $6.5 billion in 2015 and just under $10 billion in 2020.
SeanieMac is an all Irish online sports and casino wagering web-based platform. The company offers its services to customers through its full-service online betting website, SeanMac.com. The website is focused on Irish horse racing, Irish soccer and other locally popular sports, poker, bingo, and other traditional casino games played online.
One of the primary goals of the company is to focus on the underserved Irish market. Management believes this angle provides SeanieMac with a competitive advantage as well as a way to grow the user base quickly. For instance, the company is closely connected with the Gaelic Athletic Association (GAA), and its Gaelic Games. The Gaelic Games are a popular Irish pastime, and growing in worldwide appeal, particularly in areas with large Irish communities.
SeanieMac believes the GAA has the name recognition in Ireland that's comparable to the NFL in the US. Plus, as part of the relationship with the GAA, SeanieMac.com will stream in-season games and offer in-play betting (something none of its competitors offer). Essentially, by branding the company's website as the leading online gambling site for the GAA, it will help capture market share.
Moreover, BETS has the potential to thrive off a different form of name recognition, that of its Chairman, Sean McEniff. Sean McEniff is a former Gaelic Games athlete and son of Brian McEniff. Brian was a GAA all-star and founder of Brian McEniff Hotels. SeanieMac management suggests the McEniff name is to the Irish as the Trump name is to Americans, i.e. highly recognizable and associated with wealth.
What's more, the company has partnered with Boylesports - a leading online bookmaker in Europe - to provide the online betting platform, handle customer service, and provide full office support. Not only does the partnership free up management to concentrate on bringing in customers (through marketing and promotions), it also makes for easy scaling up of operations. Plus, it should result in higher margins once overhead is covered.
In terms of marketing and promotions, management has been quite active on that front. For example, one of the marketing strategies for 2013 is to offer better than average odds for bettors - something sure to be popular among bettors. Another recent announcement, SeanieMac has become the official betting partner of The Irish Daily Mirror, Ireland's leading tabloid newspaper. The Daily Mirror will promote SeanieMac through its newspaper and website and is one more way the brand name should gain traction in the Irish market quickly.
Finally, SeanieMac has already cracked the top 100 for online betting sites, debuting on the list at 94. That's not bad for a company that's only been operating for roughly 9 months.
Irish online gaming does have its share of competitors, particularly because online gambling companies based in the United Kingdom can easily offer their products in Ireland. However, there are very few options when it comes to publicly traded Irish gaming companies actually based in Ireland.
The one big player in the space is Paddy Power (PAP.L) (OTC:PDYPF). PAP is a fairly big company, with a market cap of roughly $3 billion and revenues over $700 million per year. The company generates nearly three-quarters of their profits online. However, PAP also boasts that over two-thirds of profits come from outside Ireland. As such, the company is likely not focusing its efforts on Irish bettors.
On the flip side, a company like William Hill (WMH.L) (OTCPK:WIMHY) is also big player in Ireland. WMH has a market cap over $3 billion and revenues of $1.4 billion a year. However, it's a UK company and the Irish market is a small fraction of their consumer base.
It seems clear there's room in the Irish market for a Irish-owned and Ireland-based online gambling company - one that caters specifically to Irish bettors.
As a new company - beginning operations in May 2013 - there isn't a whole lot of financial data to sort through for BETS. Since the company launched, they've had over 6,800 new accounts opened and just under 71,00 bets made.
Gross profit (revenues from a GAAP standpoint) from the most recent quarter was $162,577, up from $83,021 in the previous quarter - a 95% sequential increase. Perhaps more importantly, the amount staked climbed from $206,254 two quarters ago to $1,991,759, an impressive 866% increase in just six months.
Amount staked is an important metric in online gaming as it serves as a better predictor of revenue generation than new accounts opened. In fact, SeanieMac's revenue/gross profit works out to 8.3% of the amount staked... a relationship that should remain relatively consistent as the company grows.
BETS's fourth quarter operating costs are not yet available as of this writing. However, the previous six months of operating costs came in at $638,955. Operating costs include promotional expenses, advertising, website operation, administrative expenses, and other standard expenses. It's to be expected that expenses will outweigh revenue/gross profit in only the company's second quarter of operation. I don't see any red flags here in terms of unexpected or excessive costs.
Investing in SeanieMac comes with the common risks associated with a startup, micro-cap company. Most prominently, the company has debt to service and is not yet generating positive cash flow.
To be more specific, the company has just over $800,000 owed to RDRD II Holding, a major shareholder in the company. However, the majority of the loan amount only bears a 4% rate per annum. Plus, as a major stakeholder, RDRD has no reason to expect repayment anytime soon. Nevertheless, until the company is cash flow positive, they will likely have to rely on additional shareholder loans.
Perhaps a bigger risk factor is competition. While there's certainly room for more than one local Irish online gaming site, Paddy Power may choose to refocus on its home region if it loses too much ground to SeanieMac. Additional marketing efforts from Paddy Power could potentially cut into SeanieMac's growth rate.
In terms of trading information, BETS has averaged 74,932 shares traded per day over the last three months. While that's not a large dollar amount of volume, it's looks reasonable from a liquidity standpoint.
Meanwhile, the company has 42.2 million shares outstanding with a float of 10.1 million shares. The relatively small float suggests insiders own a large portion of the outstanding shares. That's not inherently good or bad for investors, but could result in heavy volatility in the stock price should large blocks of shares trade on a given day.
Without a whole lot of financial data to go on, I'm going to do a back of the napkin valuation based on the information we do have plus some of my own assumptions.
I don't expect amount staked to increase by 866% per half year, so let's assume instead it grows at 30% per month for the next year - a reasonable assumption giving how quickly the company should grow at the start. Let's also assume the relationship of 8.3% of amount staked to revenue/gross profit holds, which works out to roughly $147.9 million in amount staked and $12.3 million in revenue/gross profit for the first year (2014) - a very realistic number in my opinion.
It's too early to look at earnings ratios right now, so let's look at price to sales instead. We'll compare BETS to PAP, its closest competitor. PAP trades at roughly 3.5x next year's sales. If we go conservative and say BETS should trade at 2x next year's sales, it should have a market cap of $24 million.
That works out to $0.57 per share or nearly 6x the current price. Keep in mind, that's not only a conservative valuation, but that's before the betting site really starts to gain traction from a year's worth of marketing and promotions. The company could easily have $20 million in revenue within two years - and earn a profit. At that point, we'd very likely be talking about a stock price of over $1.