4. Genius Sports Limited (NYSE:GENI)
Number of Hedge Fund Investors in Q1 2024: 28
Analyst Average Share Price Target: $9
Upside: 51%
Genius Sports Limited (NYSE:GENI) is one of the more unique machine learning stocks on our list. This is because while the other stocks are primarily cloud services providers, Genius Sports Limited (NYSE:GENI) provides data streaming and other associated services primarily to the sports industry which includes bookmakers. Due to the amount of data that it handles, the firm is also able to offer machine learning for performance tracking and other uses. Genius Sports Limited (NYSE:GENI) has data rights to big ticket franchises such as the MLB and NFL until 2028, which means that the firm is in a commanding position in its market. While the stock is still cyclical, the lock in contracts mean that Genius Sports Limited (NYSE:GENI) is somewhat protected against demand fluctuations that often harm cloud computing and other firms. Given that the sports betting industry is expected to grow at a CAGR of 9.1% between 2022 and 2031 to $664 billion, Genius Sports Limited (NYSE:GENI)’s franchise deals and its presence in the sports betting market enables it to ride out this trend well.
Voss Capital was quite appreciative of the stock too in its Q1 2024 investor letter. Here is what the firm said:
The company is well positioned to continue to benefit from increased sports betting legalization and the growth of in-game betting in the US, regardless of which sportsbook(s) ultimately command the most market share. We expect the company to maintain >20% organic 5 | P a g e revenue growth with >50% incremental EBITDA margins over the next few years. If correct, we believe we are paying < 10x 2027 FCF at today’s market prices.
GENI’s new BetVision was only recently launched in September 2023, and it enables in-game bets for the NFL with low latency as well as calculating and displaying real-time analytics and odds. In-game betting makes up 25% – 30% of bets in U.S. football vs 80%+ in the more mature UK soccer betting market. We believe NFL games, which comprised 96 out of the top 100 viewed television programs last year, lend themselves even more to in-game betting with more potential variables/events than soccer. Key to the thesis is that GENI’s take rate for in-game bets (5% – 6%) is 3x higher than the take rate on facilitating pre-game bets (1.5% – 2.0%) and comes at zero incremental cost to GENI, thus is highly margin accretive with a long runway for increased penetration to catch up to more mature regions like the UK:
“As we continue to increase the in-play betting, we directly benefit from this higher revenue share at no incremental cost, therefore, contributing to our profitability at near 100% margin.” – GENI November 13th, 2023 earnings call
It is notable that GENI has beaten and raised guidance for the last nine quarters in a row, establishing near bulletproof credibility in our minds that management does what they say will do, and yet the market remains highly skeptical of their visibility on rights costs and the scalability of the NFL and UK soccer rights that GENI pays for and recently extended, thus creating the attractive buying opportunity recently.
Our base case price target of $11.00 (>110% upside) by late 2026 uses 12x 2026 EBITDA. 12x seems conservative in the context of what we anticipate being a 40%+ EBITDA CAGR over the next few years and ultimately a 30%+ EBITDA margin business at maturity in a duopolistic industry structure. Longer term, we believe the upside is much greater.
