Pointsbet: Betting big

Dean Fergie

Cyan Investment Management

Since listing in mid-2019, Pointsbet (PBH) has provided its investors with much volatility but, mostly, with big sharemarket wins. The stock galloped from its $2 IPO to above $6 before the COVID virus struck the stock hard, sending it hurtling back towards $1. More recently, investors have returned to the story enthusiastically, buying it back to its former highs.

The company has been well supported by the capital markets: the $75m oversubscribed $2 IPO in June 2019 was closely followed by a further $122m capital raising in October 2019 at $3.60.

For an early-stage business, this quantum of capital requirement might otherwise raise some eyebrows, but PBH’s aspirations are both lofty and capital intensive.

Betting on the US market

As a global online betting business, PBH holds a decent foothold in Australia with over 80,000 active customers, but the main game has been the company’s aspirations to become a major player in the massive US betting market.

The US could be considered a laggard with respect to online wagering. All states are independently legislated with around 20 that have legalised online sports betting. It can logically be expected that many will follow and this is the market PBH hopes to capture.

Source: ESPN.com.au

The challenge from a financial perspective is the cost involved in attracting and signing-up new customers in such a competitive region as the US. Interestingly, businesses such as PBH with experience in the developed Australian (and European) markets can be considered to have a first-mover advantage due to the experience they have acquired from operating in already developed markets. However, this does not alleviate the costs involved in building a presence in a new jurisdiction.

Breaking into a big market has big costs

In 1H20 PBH spent a not insignificant $20m in just sales and marketing, which saw their overall EBITDA loss for the half at $28.4m. With COVID this has declined for the short-term (PBH spent $7m in sales and markets in Q3), but with the absence of sporting events, so too has the revenue line.

Notwithstanding the cash-burn required to target a massive new marketplace, fundamental investors also struggle with the profit-line of wagering businesses, that being the so-called ‘win margin’ or percentage by which the company pays out less in bets than it receives.

Win rates can be notoriously volatile, PBH’s win margin in Australia is presently around 8% and yet in the US it is closer to 2%. It is impossible, of course, for outside investors to have any certainty over what this figure will be in the short-term. Just like insurance businesses however, it is reasonable to assume that the management is experienced enough to, over the long-term, run a profitable gambling book.

Overall, PBH can only be considered a horizon investment proposition. There is no doubt the pathway to profitability appears long, albeit incredibly well-funded with over $150m on the company’s balance sheet. Whilst the business is achieving EBITDA break-even in Australia, the cost of entering the US means the company might need their customer base in the US to increase 10 fold (to 200k) before achieving break-even in that region.

With uncertainty around long-term, sustainable win margins, customer acquisition costs and legislative outcomes in new US states, notwithstanding the COVID related uncertainty with respect to the re-starting of global sporting events, PBH is all but impossible to value on fundamental metrics.

Momentum on its side

With a current market capitalisation of almost $800m there is much blue-sky factored in. 

However, momentum (both operationally and sentiment) is well behind the business currently, thus there’s every chance the stock will see its fortunes continue to prosper.

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Dean Fergie
Director & Portfolio Manager
Cyan Investment Management

Dean has over 25 years experience in the funds management industry covering all major asset classes. He holds as Master of Applied Finance and is a Graduate of the Australian Institute of Company Directors.

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