Rush Street Interactive Inching Closer to Profitability

Posted on: August 7, 2022, 04:55h. 

Last updated on: August 7, 2022, 07:07h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Like so many online sportsbook operators, Rush Street Interactive (NYSE:RSI) struggled to reach profitability following its initial public offering (IPO). But those dark days could be drawing to a close.

Rush Street Interactive
A Bet Rivers sportsbook in Illinois. Operator Rush Street Interactive is stemming losses. (Image: Wall Street Journal)

The gaming company reported a second-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $19 million — well below the $43 million it lost in the March quarter. That’s a positive sign, because RSI and some of its peers have been dealing with steep EBITDA losses for several quarters.

Roth Capital analyst Edward Engel believes RSI can become profitable in the second half of 2023 and deliver material EBTIDA growth going forward starting in the following year.

While RSI expects 2H22 marketing intensity to reaccelerate vs 2Q22, 1Q22 remains the high water mark moving forward, even alongside launches in Ohio and Massachusetts,” wrote the analyst in a client note. “This creates a significant EBITDA swing during 2023, and points to rapid EBITDA growth in 2024 and beyond.”

He rates the stock “buy” with a 12-month price target of $10, up from $8. The new forecast is well above Friday’s closing price of $5.89. Share of RSI are down 64.30% year-to-date.

Rationalizing Environment Positive for RSI

With Massachusetts and Ohio expected to go live with online sports betting in early 2023, the rest of next year could shape up favorably in terms of spending for sportsbook operators.

That could change to some extent if California voters approve mobile wagering in November. But Texas is unlikely to follow suit in 2023 and Florida appears off the table until the following year. Slowing expansion has benefits because it means companies such as RSI can rein in marketing and promotional spending.

“We also expect new state launches to slow after 2023. While this limit’s RSI’s medium-term total addressable maket, it also accelerates EBITDA margin expansion,” adds Engel.

That’s relevant because some RSI rivals, including BetMGM and Caesars Sportsbook, are nearing profitability. While those sportsbooks are part of casino monoliths, their ability to stem losses and turn profits puts pressure on competitors to do the same.

RSI operates under the BetRivers and PlaySugarHouse brands, and is currently available with mobile or retail businesses in Colorado, Illinois, Indiana, Iowa, Michigan, New Jersey, New York, Pennsylvania, Virginia, and West Virginia.

Other Reasons to Like RSI

RSI has some other potential tailwinds, including its status as a value play in a field of battered growth stocks.

“RSI trades at ~1.5x 2023E revenue, which is a wide discount to DraftKings’s (NASDAQ:DKNG)  2.3x and the implied ~3x for Penn Interactive,” notes Engel. “We believe some of RSI’s discount is related to lower gross margins vs DKNG’s. While DKNG’s ~40-45% gross margin is well above RSI’s ~35%, DKNG’s fixed cost base is also much higher alongside vertical tech integration. Alternatively, RSI’s lower fixed cost base creates a faster path to profitability, and we see investors favoring that as RSI’s profitability becomes visible sooner.”

Additionally, RSI is a rising player in Latin American, confirming it has geographic diversity relative to rivals that are focusing mainly on the US and Canada.