Our new top growth pick: Pointsbet
Our previous top growth pick, Carvana, has performed nicely, up to $74 from our initial purchase price at $36, after posting over 100% organic growth while dramatically improving margins.
We have a portfolio of these kinds of ideas, but our latest pick is Pointsbet, which has appreciated significantly from our original purchase around $3.
We wrote a short summary of our thesis in a recent Livewire collection, Finding the next Afterpay. We have expanded on our thesis on Pointsbet more fully in this wire, to explain why we are so excited about this company.
US market a rare greenfield opportunity
For background, sports betting was made legal in the United States in May 2018, (more accurately, the Supreme Court declared this a decision for the states) and New Jersey legalised sports betting shortly after in June 2018.
Pointsbet launched in New Jersey in January this year, and by 30 June had taken over 5% of the market.
This is a rare legislation-induced greenfield opportunity. Estimates of US sports betting are difficult. Data is hard to find and the legal market will likely be larger than the black market. Pointsbet pegs the opportunity at $17 billion, though estimates well over $50 billion are also common.
Pointsbet has built relationships with a number of racetracks and casinos, generally signing 10-20 year deals. These are symbiotic, as each venue is incentivised to increase members. In once case, the licensee even became a shareholder of Pointsbet. Pointsbet owns the customer and all the data.
For the year to 30 June 2018, Pointsbet recorded about $25 million of revenue. Sports betting is competitive. Gross margins are high, but net margins are low, as there's intense competition over incentives. As is generally the case in the equity market, if this investment goes wrong it will be due to enemy action.
Why are we so excited?
Well, in July and August this year, Pointsbet posted over 240% year-on-year growth over the similar period the prior year. Needless to say, achieving that throughout the year would be quite an achievement - and dramatically ahead of broker estimates.
When looking at stocks like this, we play close attention to margin. I don't necessarily care where it is, but pay close attention to where it's going. The best investment returns often come from bridging the gap between an unprofitable but viable and fast-growing business, and the same business in cashflow rich maturity.
In Pointsbet's year-to-date update covering July and mos of August, margins increased substantially with the >240% revenue increase.
As per usual, we use alternative third party data to test our hypothesis.
July and August posted excellent performance. Can this be confirmed, and what has happened since?
Well, google trend traffic in the United States has doubled:
This is extraordinary. In New Jersey, in less than six months to 30 June this year, Pointsbet took 5.4% market share. Search traffic has doubled since then.
This is almost entirely due to one state, New Jersey:
Pointsbet is also operational in Iowa.
This data isn't perfect, but imagine what they can do as they roll out state by state across the United States, and the map above lights up blue. After Iowa and New York (pending state regulation), Pointsbet has partner licenses in 7 states.
And that doesn't include the potential contribution from giant states like California. There is a long runway here.
Other sources of data match up with the thesis. In particular, online sports betting in New Jersey has grown 10x from August 2018 to August 2019, albeit off a small base. It's quite possible that Pointsbet loses market share and still grows substantially. It's quite likely that after a period of rapid growth, the industry consolidates, and Pointsbet is a beneficiary.
This is an area where Australians have expertise. Pointsbet's CEO Sam Swanell was head of risk at William Hill, the President of Product and Technology was CTO of Aristocrat Leisure, the VP of strategy was the US BDM for William Hill, and the COO was head of IT and product at Pokerstars and tomwaterhouse.com.
There aren't any large funds on the register, but Penn National Gaming, owns 5%. This is a helpful alignment, as Pointsbet has a 20 year agreement to operate under Penn's license in Ohio, Indiana, Missouri, West Virginia and Louisiana.
The Chairman Brett Patton and cofounder Nick Fahey were buying shares after the last result, and so were we.
The scale of the opportunity here is way out of whack with its current market cap of ~$550 million, even after the >50% increase in price over the past few weeks. You could do far worse than place a bet here.
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Michael manages a global equity investment fund focused on technology and the life sciences. Michael completed undergraduate and graduate chemistry degrees at Magdalen College, Oxford University, and studied finance at the London School of Economics