- GAN makes its money as a percentage of net gaming revenues generated on its platform. The US online gambling industry is growing rapidly.
- GAN’s patented iBridge technology enables the integration of existing offline loyalty programs to the online platform. This makes GAN's product unique and very "sticky"
- Coolbet itself is no slouch. The company has won numerous accolades and completes GAN's technology stack. The combined company is worth more than a sum of its parts.
I really like "picks and shovels" type investments and am generally bullish on the US online gambling industry. So you can imagine my delight when GAN Limited (NASDAQ:GAN) ticked both those boxes.
Just a brief background on the company, GAN is an enterprise software provider to the online gambling industry. It provides a complete SaaS-based solution including back-office and customer management that is enabling the casino industry’s ongoing digital transformation. GAN’s turn-key solution allows rapid deployment and scaling of new sites, games, and features which then, in turn, allows casino operators to focus on what they do best. The bullish case for the company is pretty straight-forward. GAN is your classic “pick and shovels” play and the gold-rush is the legalization of online gaming across the US.
The company’s potential customer base includes commercial casino operators and tribal casinos of which there are 465 and 514 respectively in 2019 in the US. GAN has about 101 retail outlets operated by its customers but is only generating a substantial amount of revenue from states where online gambling is legalized. Some of its most prominent clients include WynnBET by Wynn Resorts (WYNN) which I have covered here.
Unlike most other SaaS providers, GAN makes its money as a percentage of net gaming revenues generated on its platform. Therefore GAN’s growth isn’t limited by the number of casino customers it gets and is correlated to the growth of the industry. The US online gambling industry is growing rapidly and is forecasted to grow at a CAGR of 15.4%. Online gambling and sports betting are expected to be worth $17 billion and $14 billion by 2030.
In my view, GAN has several key competitive advantages. GAN’s code is built to handle multi-state jurisdictions and regulatory requirements. This is important as it makes it incredibly difficult for operators to develop their own code/ platform in-house. The second advantage is GAN’s patented iBridge technology. This technology enables GAN’s customers to sync its existing offline loyalty programs to its online platform. This basically enables a crucial omnichannel experience by allowing casinos would to reward online gamblers with complimentary offers in their retail establishment. For example, play 1,000 games online to win a free night's stay or other such offers. I’ve detailed in my Wynn Resorts article how crucial an omnichannel experience is for the customer. With GAN having patented such a crucial piece of technology, I believe will only make its software offerings that much stickier.
GAN recently acquired Coolbet, a Business-to-Consumer iGaming and sportsbook operator primarily focused on Northern Europe, Canada, and Latin America. I believe this acquisition is brilliant and the combination of GAN and Coolbet is worth more than a sum of its parts. First, the big question I always had with GAN was that it was missing the technology to enable sports betting. Not anymore. With Coolbet, GAN has acquired a leading sports engine enabling it to offer a SaaS-based sports betting solution to its casino clients.
Coolbet itself is no slouch as the company is pretty impressive in its own right. The company has won numerous accolades such as winning the London-based International Gaming Awards “Mobile Sports Product of the Year” for two years straight (2019 and 2020). I want to note that in this particular award category, Coolbet edged out the much larger Scientific Games (SGMS). What makes Coolbet’s platform unique is the transparent availability of betting-related data and high engagement via its live sports lobby. The company is also strong in a lot of the operational metrics such as a high conversion rate (70%), an industry-leading customer retention rate (85%), and low customer acquisition costs. Coolbet had year-on-year revenue growth of roughly 46% in 2020.
Coolbet is set to continue to operate in the B2C market in its current jurisdiction and international markets. The company can also leverage its relationship with GAN to further strengthen its online gambling capabilities for those jurisdictions. This will be particularly important as it expands to other markets that are undergoing their own wave of gambling legalization such as in Canada and Chile.
GAN acquired Coolbet for $175.9 million and had to do a secondary stock offering to fund the purchase. Despite the dilution, I like that the company did not fund the acquisition with debt as it gives GAN plenty of “dry powder” to continue its rapid expansion plans. Coolbet was also acquired at a pretty good valuation of 6.3x and 3.5x enterprise value to revenues. This gives me confidence as an investor as it shows that management did not overpay and has been rather prudent with its deployment of capital.
Valuation and Investor Takeaway
Looking at the company’s latest earnings results, GAN is well on track to achieving its growth plans. The company’s Q3 2020 revenue was up 86% compared to the same time last year as it increased from $5.5 million to $10.3 million. The company also showed strong Active Player-Days and Average Revenue per Daily Active User growth of 38% and 27% respectively. The company’s gross margins for this period also increased from 44% in 2019 to 62%. Nine-month YTD revenue for 2020 was $26.3 million.
I fully expect Q4 2020 revenue to be as good if not better. I also fully expect revenues in 2021 to be much better due to the successful launch of 3 of the company’s big customers in the Michigan market. State regulators announced that online gambling and online sports betting brought in $42.7 million in the first 10 days alone. This could be a sign of things to come as other states decimated by COVID will look at the cash generated by legalized gambling in Michigan and follow suit.
In terms of valuation, assuming GAN will end Q4 2020 with roughly the same revenue as in Q3 2020 will give me a forecasted full-year revenue for GAN of $36.6 million. In the nine-months of 2020, Coolbet had revenues of $20.9 million which we can annualize to $27.9 million. In total, the new combined GAN entity should have 2020 revenues of roughly $64.5 million. At a market cap of $1.15 billion, the company has a 2020 price to sales ratio of 17.8x which is a bit on the expensive side. However, the company’s long-term revenue forecast is a lot rosier. Assuming a 30% penetration of the combined $31 billion online gambling and sports betting markets with a 5% revenue share gives us revenues of $450 million. This excludes revenues from potential international expansion leveraging off the strength of Coolbet.
Overall I like the company and have a bullish outlook for online gambling over-all. I believe GAN is a lower-risk way to participate in the legalization of online gambling in the US as you are not relying on a particular casino to be successful. I have a buy rating for GAN.
Despite my liking the stock, there are a few key risks that investors need to be aware of.
1. The online gambling industry is highly dependent on government action on legalization. If states decide not to legalize or put a heavy regulatory burden on the industry, the full-size of the forecasted TAM may not be realized.
2. States like New York possibly going on their own and cutting the casino "middle-man" is a double-edged sword for GAN. It's great if they win the state-wide contract but if not they effectively get locked out of that market.
3. GAN's success depends on its partner's success as they get paid a percentage of gambling revenue. GAN's casino partners not able to gain significant market share would negatively affect the company.
This article was written by
Analyst’s Disclosure: I am/we are long GAN, WYNN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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