Gan’s B2B Platform Is Set To Capitalise On The High Growth US Online Gaming Market
Long/Short Equity, Long Only, Growth At A Reasonable Price, hedge fund intern
Seeking Alpha Analyst Since 2020
Currently working as a graduate Auditor at a Big 4.
Summary
- Differentiated product.
- Strong market shares in key areas.
- Very attractive Total Adressable Market at Maturity.
- Listed in May 2020 and very underfollowed.
- The Market has recently overreacted to one off costs and news.
Business Description
Gan is a British company that provides SaaS solutions to online casinos and sports betting firms (operators). Their GameSTACK TM IGS platform offers the following:
- Player monitoring.
- Payment services.
- Design solutions for the operators’ platforms.
- Customised messaging and marketing from the operators.
The company has provided operations such as these for over 15 years and listed shares in the US during May 2020.
GameSTACK platform (Simulated and Real Money Gaming) – the online casino.
Through partnerships with platform designers such as International Game Technology and Scientific Games, Gan gives operators access to a variety of design solutions for their online platforms instead of just one.
The GameSTACK platform also provides visibility into consumer activity through analytics and messaging. This enables operators to customise their marketing and age verify users, helping them maintain captivity and operate within regulatory constraints.
iBridge Framework – loyalty points and player monitoring, both online and offline.
Customers can use their existing loyalty club card points from brick and mortar operations online thanks to Gan’s iBridge Framework. Points can also be purchased online for use on the operator’s GameSTACK platform.
iBridge also captures consumer data such as email addresses, sending it to the operator’s Casino Management System, allowing for the customised marketing. This can be automated between online and offline spaces.
SENSE3TM Mobile
Operators can use this to deploy content, promotions and messages through mobile devices, enabling in-app purchases, location-based marketing tools and player notifications. Available through iOS and Android.
iSight Back OfficeTM
iSight provides dashboards for the monitoring of its operators’ activities. The technology provides the interface allowing operators to visualise data, manage accounts, manage loyalty programmes and marketing.
Services
Services are provided to Gan’s operators through assistance with the customisation and deployment of its platform.
Evergreen Technology – can scale to multiple jurisdictions with different regulations
The scalability of Gan’s business model is shown by its Evergreen technology – the single code base is designed for operation in different regulatory environments as it ensures that systems can be easily kept up to date. This enables it to quickly grow worldwide and capitalise on deregulation.
Revenue Streams and Financials
Launches in Indiana and Pennsylvania, recently deregulated states, led to the explosive growth in 2019. Services accounted for 23% and 17% of revenues in 2018 and 2019 respectively.
Revenue is contractually defined as a percentage of Gross Operator Revenue. This ranges from 4-7% (see Figure 5). For simulated gaming, players purchase virtual credits.
Net income
* Decrease partially arises from D&A rising from $4.23m to $6.18m from 2017 to 2018.
Gan has a short track record of profitability. But the Total Addressable Market size makes it a compelling opportunity.
US Industry Growth
US deregulation
In April 2018 The Professional and Amateur Sports Protection Act of 1992 (PASPA) which prohibits sports betting was repealed. It conflicted with the 10 th Amendment according the Supreme Court of the United States as it restricted regulatory decision making on a state governor level.
States have since begun to deregulate, including New Jersey and Indiana where Gan has a presence. The map below shows the deregulation after the repeal.
Figure 4: US states’ sports betting regulation status (ESPN June 2020), details here.
Gan has so far launched in New Jersey, Pennsylvania and Indiana after the repeal. In August 2020, Gan stated a Michigan launch is “highly probable”. Several clients are looking to deploy across states, with one looking to expand to Illinois, Tennessee and Michigan, representing a $300m-$400m operator revenue opportunity.
Potential client discussions are also taking place in Louisiana, Arizona, Wisconsin, Minnesota, Colorado and Illinois. A launch in Ohio is anticipated in 2021.
Brick and mortar to online
iGaming allows people to enjoy a wide variety of gambling experiences from the comfort of their own home or on the go.
Growth in internet of things, chatbots and blockchain also support this industry as they allow online platforms to become more manageable and depend less on human capital and third parties. Economic developments in emerging markets will also contribute, such as increased access to the internet in India.
Figure 5: Gan US total addressable market forecasts from Eilers & Krejcik and Macquarie. Maturity is at 2025-2030. Taken from Investor Relations.
Competitive Advantage
Gan’s platform has been developed over 15 years and partners with developers and payment processors. This ensures optionality for operators who manage their online experiences.
Their patented iBridge Framework allows operators to transfer their customers’ loyalty points online unlike other competitors, meaning Gan allows operators to better maintain customer captivity as betting shifts online. This is essential, given that competitors will be a few clicks away. The tech also enables rewards to be allocated to offline players, maintaining captivity and efficiency in ways that other competitors such as less specialised B2C providers can’t.
There has been no significant increase in new entrants since PASPA repeal despite the huge opportunity, so Gan’s flexible platform is hard to dislodge, and the operators face high switching costs if they want to migrate to another platform. Gan’s experience is advantageous as it has allowed them to collect billions of betting and transaction data points, offering analytics capabilities for operators that new entrants can’t.
Gan facilitates over 50% of sports betting transactions in Italy so has a solid market share. The company has over 18 operators in the US representing over 94 casino properties, they transcended the competition post PASPA so have the first mover advantage in gaining clients. This maintains captivity and helps forge a great reputation in the industry, supported by the fact that transaction volumes are market leading in New Jersey and Pennsylvania where Gan has been licensed since 2018 and 2019 respectively.
Low unit economics
Given the SaaS nature of the business and Evergreen technology, Gan is incredibly scalable and is relatively invulnerable to working capital changes due to no supply chain risk. Royalties to partners, marketing and development costs are Gan’s key costs. They have remained relatively stagnant over the past 5 years.
*Higher wages and salaries in 2019. Revenue growth was much higher.
It seems the only additional costs with scale arise from additional employees, with 100, 130 and 140 in 2017, 2018 and 2019 respectively.
Growth Strategy
Other than gaining and maintaining relationships with new and existing clients, as well as continuing to invest in GameSTACK, Gan aims to acquire game developers to develop its own content, pursuing “prudent inorganic growth”.
This seems prescient given the higher margins that can be unlocked as no royalties would be required.
Gan also has significant cash reserves and little debt on its balance sheet ($63.8m in cash vs $15.6m in debt, $15.2m of which is current, as of June 2020) so is well positioned for this capital allocation.
KPIs
Figure 7: Gan KPIs, from Investor Relations.
Active Player Days – monthly total of individuals who use the clients’ platforms.
Annual Revenue per Daily Active User (ARPDAU) – Gross Operator Revenue ÷ Active Player Days.
Gan Take Rate – Gan Revenue ÷ Gross Operator Revenue.
Active Player Days rose sharply due to COVID lockdowns, the fact that ARPDAU also increased shows the impact of the client adds. With state expansions well underway and Gan’s strong market share in existing states, ARPDAU will increase.
Management Team
CEO Dermot Stopford Smurfit has been with Gan since 2002 and has been a director since 2003. He has prior experience in sales and marketing for Gan, as well as in investment banking for 3 years where he specialised in M&A, strategic advisory and private equity financing experience in the gaming technology industry.
His extensive and multifaceted experience makes him a strong candidate for a CEO who can add value while working in a dynamic industry.
CFO Karen Flores has previous experience in financial planning at Alorica, Maker Studios (where she managed the audit before the company was bought by The Walt Disney Company), MySpace Music, Napster and Microsoft since leaving university in 1997. Like Dermot, she has the extensive experience, but is more specialised towards financial planning which logically suits a company CFO. She joined Gan in January 2020.
Insider ownership at 18% of shares outstanding
This ownership structure shows very close alignment with shareholder interests as insiders own 18% of shares outstanding.
Figure 8: Share ownership structure, from Simply Wall Street.
Valuation
As Gan only listed recently in May 2020, the company remains largely underfollowed and underappreciated given the revenue opportunity and competitive advantage. Only 4 sell side analysts follow the stock and the company trades at ~$500m market cap, showing that large institutional investors have yet to invest.
As the business grows and becomes picked up by the sell side analysts, more institutional investors will notice the opportunity. This could also lead to listings in higher cap indices such as the Russell 1000 or S&P 500, Gan currently trades on several Russel 2000-3000 and small cap indices.
Revenue projections
My DCF model is based on the previously mentioned forecasts from Eilers & Krejcik and Macquarie in Figure 5.
Table 1: Gan US revenue projections for sports betting and online gambling (iGaming). All figures in $m. | |||||
Year |
Sports Betting Market Size |
Gan Sports Betting Revenue(take rate: 5%, operator market share: 20%) |
iGaming Market Size |
Gan iGaming Revenue(take rate: 6%, operator market share: 30%) |
Total US Revenue |
2021 |
$1,697 |
$17 |
$1,286 |
$23 |
$40 |
2022 |
$2,139 |
$21 |
$1,713 |
$31 |
$52 |
2023 |
$2,695 |
$27 |
$2,283 |
$41 |
$68 |
2024 |
$3,396 |
$34 |
$3,041 |
$55 |
$89 |
2025 |
$4,280 |
$43 |
$4,052 |
$73 |
$116 |
This model is conservative as it involves the following assumptions:
- Market maturity at 2030 – the upper end of the estimate.
- An exit multiple of 12.95 EV/LTM Revenue, the lowest since listing.
- The market share of Gan’s operators is constant.
- Simulated gaming revenues are excluded.
Despite these, a price target of $50 was reached, indicating 189% upside from $17.30 (18 th September 2020 close). The model is here.
Margin of safety
The disparity between the market price and intrinsic value of Gan has grown. The stock sold off ~20.5% after reporting Q2 earnings during August 2020. The selloff arose from the Q/Q jump in admin expenses from $2.7m to $13.7m. $8.8m of this was related to Gan’s IPO (share based compensation and admin) and so is a one-off charge.
The market responded by pricing the shares as though the jump in costs was going to be recurring, which isn’t the case. Gan also reaffirmed revenue guidance of $37m, which could also be why the shares traded down as management were only slightly less optimistic than presumed.
The shares fell another ~18.5% during mid-September 2020 after Gan affirmed that it was not the app provider of its simulated gaming client Penn National which launched its app as part of a relationship with Barstool Sports. This seems like an overreaction as Gan never stated they had an app relationship with them.
Figure 9: Average Gan sell side price target, from S&P Capital IQ. There is a large difference between analyst opinions and market pricing – a good sign.
Why I think the regulatory risk is mitigated.
Regulating online sports betting and gambling platforms will prove difficult and unnecessary for regulators. Management mentioned online offshore gambling being used before PASPA repeal, these operators have no US license and 97% of US bets were made through them in 2018 according to the American Gaming Association.
Therefore, the prevention of illegal gambling is difficult, which was raised by the UK Betting and Gaming Council after £2 stake limits were proposed on online fixed odds betting as players would be driven to unregulated black/grey markets. Given the rise of blockchain use, it will become even more difficult to regulate as transactions will become harder to track.
To quote Geoff Freeman, President and CEO of the American Gaming Association:
“ The failed federal ban on sports betting has created an illegal, unregulated sports betting market that offers zero consumer protections and generates zero revenue for state and tribal governments […] AGA is focused on working with all stakeholders to put the illegal market out of business and enable a safe, legal way for American consumers to participate in next year’s office pool without fear of prosecution.”
US regulators are looking to extinguish the illegal market while simultaneously generating more tax revenue, so given these incentives, it is unlikely to be reregulated. Consumers are also in favour of a legal market, according to a 2018 survey by Nielsen Sports, 71% of sports bettors would use legal platforms if they’re available.
Gan’s revenues from current operators would also be immune to taxes and levies, given that contracts with operators are based on a Gross Operator Revenue percentage. However, this would impact gaining additional smaller operators if they close as a result.
Conclusion
Gan has a clearly differentiated product and a competitive advantage shown by strong market shares in key areas and a patented loyalty scheme system for operators. The loyalty schemes are essential for operators when gambling shifts online, as their geographical advantage in terms of customer captivity will become obsolete. Gan offers the solution to this that others don’t. It also offers optionality in design solutions, allowing them to become more differentiated in a competitive market.
Not only is it a very promising company, but also very underfollowed. Institutions have yet to pledge capital given the small cap nature and coverage by only 4 analysts. As revenues grow and more investors recognise the clear opportunity, shares will gain upside.
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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