Gaming small-cap a good bet, says Ausbil

Glenn Freeman

Livewire Markets

Online betting company Pointsbet Holdings (ASX: PBH) shares have risen more than three-fold in 12 months, but profitability remains in the red, almost two years after its ASX listing. But the catalysts for growth outweigh the risks, says Ausbil Investment Management portfolio manager Mason Willoughby-Thomas .

He’s not overly concerned by the negative numbers tabled by Pointsbet management today, including a statutory loss of $85.6 million for the half, up from a $32.2 million loss a year earlier.

By the numbers

  • Pointsbet's statutory loss of $85.6 million for 1H 2021 was more than double the $32.3 million loss of a year earlier
  • Four-times the turnover on its platform was generated during Superbowl 2021 versus the same event last year
  • US$ 500 million: the five-year revenue opportunity opened up by Pointsbet’s 2020 tie-up with NBC Universal
  • 180 million: the number of new customers the above deal added to Pointsbet’s books

“The key performance indicator for us is that they’ve continued to add to their customer base,” says Willoughby-Thomas.

“It’s a company where loyalty is fleeting, and so churn is naturally very high, with management needing to continually invest in marketing spend.”

The company’s fast-growing North American operations added more than 68,000 active clients in the year to 31 December 2020 – up 220% year-on-year. And the Australian and New Zealand business grew 77% to almost 143,000 active clients.

Spend money to make money

As a market segment with high levels of competition and low switching costs – there’s little stopping gamblers jumping between a raft of different sports betting companies – marketing spend is generally accepted as an unavoidable cost of doing business.

“And as a company that’s in an early phase of penetrating into North America, you need to spend heavily.”

In the second half of last year, Pointsbet raised US$393 million to fund a landmark partnership with large incumbent NBC Universal. It also inked a deal with new brand ambassador, former marquee NBA player Shaquille O’Neal.

Were there any surprises in the result?

“Talking to people around the market, the level of spend was a little bit of a surprise, it was a bit higher than was expected, particularly on the marketing and headcount costs,” says Willoughby-Thomas.

“But that’s indicative of the opportunity that’s ahead of them, with the momentum quite strong in the markets they’re in.”

He says it’s important for Pointsbet, having broken into the highly competitive but extensive market of the US and potentially Canada later in the year to “strike while the iron is hot and to build on that momentum.”

Moving into North America in 2018 opened up an exponentially larger addressable market. And while Willoughby-Thomas anticipates earnings losses from the company for some time yet, “the pot of gold at the end of the rainbow is pretty large”.

Management is targeting around US$500 million in revenue over the next three to five years – based on a 10% share of a five- or six-state US market worth an estimated total of between US$5 billion and US$6 billion.

What were the highlights of the result?

The rising client volumes are a standout for Willoughby-Thomas, also singling out the headline annual North American sporting event, Superbowl 2021. Given the scale of viewership, it was a big test of the Pointsbet platform, which processed four-times the turnover during Superbowl 2021 relative to last year’s event.

“But their backend was able to handle that increase in volume without downtime or outages, and was a good test for the robustness of their technology stack,” he says.

Willoughby-Thomas is also buoyed by the firm’s recent rollout of new products, including multi-bets and in-play betting features. 

And he regards Pointsbet’s fourth-quarter 2020 deal with NBC Universal as something of a coup; a huge vote of confidence in the relatively small company.

“Another thing I like about it is it’s very catalyst-rich,” says Willoughby-Thomas. The firm entered strategically important US states including Illinois and Colorado during the half, and also moved into Illinois, where NBC Universal enjoys a strong presence.

Pointsbet management is also eyeing the lucrative Canadian market with a potential launch in Ontario later in the year. Ontario's combined sports betting and gaming market potential is worth around US$2 billion a year.

Do you hold a position in Pointsbet? And if so, how has this changed in recent times?

Ausbil’s small- and micro-cap strategies maintain sizable positions in Pointsbet, having bought in soon after its IPO’s in mid-2019.

The company ranks among the top-10 holdings of Ausbil’s Australian Small-Cap Fund. It is also a top-performer in the Ausbil Micro-Cap Fund, returning more than 31% during January – a month that also saw Pointsbet break into the ASX 200.

“When the birds are chirping, sometimes you’ve got to feed them”
“We got in not long after the IPO. We’ve traded around a little bit, but we have a core holding,” says Willoughby-Thomas.

“When the stock popped above $16 a share in late January, we sold a bit, and we'll look to top up again on any share price weakness.”

As part of a growing cohort of technology-heavy companies that have captured investor sentiment despite yet turning a profit, he concedes the share price has been volatile. But insists his team are investing for the long-term.

“We see it as a unique opportunity in a big market. And as an early mover, we think the outlook is quite positive.”

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The information contained in the article is given by Ausbil Investment Management (ABN 2676316473) (AFSL 229722) (Ausbil) and has been prepared for informational and discussion purposes only and does not constitute an offer to sell or solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement or other offer document (collectively Offer Document) relating to an Ausbil financial product or service. A copy of the relevant Offer Document may be obtained by calling Ausbil on +612 9259 0200 or by visiting www.ausbil.com.au. You should consider the Offer Documents in deciding whether to acquire, or continue to hold, any financial product. Neither this article nor the provision of any Ausbil Offer Document is, and must not be regarded as personal advice or a recommendation or opinion in regards to an Ausbil financial product or service or securities of any other entity including Pointsbet Holdings(PBH) or that an investment in an Ausbil financial product or securities of any other entity including Pointsbet Holdings(PBH) is suitable for you or any other person. This article and the information it contains is for general use only and does not take into account your personal investment objectives, financial situation and particular needs. Ausbil strongly recommends that you consider the appropriateness of the information and obtain independent financial, legal and taxation advice before deciding whether to invest in an Ausbil financial product or service or in the securities of any other entity including Pointsbet Holdings (PBH). The information provided by Ausbil has been done so in good faith and has been derived from sources believed to be accurate at the time of completion. While every care has been taken in preparing this information. Ausbil make no representation or warranty as to the accuracy or completeness of the information provided in this article, except as required by law, or takes any responsibility for any loss or damage suffered as a result or any omission, inadequacy or inaccuracy. Changes in circumstances after the date of publication may impact on the accuracy of the information. Ausbil accepts no responsibility for investment decisions or any other actions taken by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Ausbil does not guarantee the performance of any Fund or the securities of any other entity including Pointsbet Holdings (PBH) the repayment of capital or any particular rate of return. The performance of any Fund depends on the performance of its underlying investments which can fall as well as rise and can result in both capital gains and losses. By viewing this article, you agree to be bound by these limitations, terms and conditions set out in the paragraphs above. Unless otherwise specified, any information contained in this publication is current as at the date of this article and is prepared by Ausbil Investment Management Limited (ABN 26 076 316 473 AFSL 229722) (Ausbil). Ausbil is the issuer of the Ausbil MicroCap Fund (ARSN 130 664 872) (Fund) and the Ausbil Australian SmallCap Fund (ARSN 630 022 909). This article contains general information only and the information provided is factual only and does not constitute financial product advice. It does not take account of your individual objectives, financial situation or needs. Before acting on it, you should seek independent financial and tax advice about its appropriateness to your objectives, financial situation and needs. Securities and sectors mentioned in this monthly report are presented to illustrate companies and sectors in which the Fund has invested and should not be considered a recommendation to purchase, sell or hold any particular security. Holdings are subject to change daily. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance. Unless otherwise stated, performance figures are calculated net of fees and assume distributions are reinvested. Due to rounding the figures in the holdings, breakdowns may not add up to 100%. No guarantee or warranty is made as to the accuracy, adequacy or reliability of any statements, estimates, opinions or other information contained herein (any of which may change without notice) and should not be relied upon as a representation express or implied as to any future or current matter. You should consider the Product Disclosure Statement which is available at www.ausbil.com.au before acquiring or investing in the fund.

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Glenn Freeman
Content Editor
Livewire Markets

Glenn Freeman is a content editor at Livewire Markets. He has around 10 years’ experience in financial services writing and editing, most recently with Morningstar Australia. Glenn’s journalistic experience also spans broader areas of business...

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