Sportradar Could See DraftKings-Like Resurgence, Says Fund Manager

Posted on: May 17, 2024, 12:13h. 

Last updated on: May 17, 2024, 12:13h.

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

On the back of a strong first-quarter earnings report, Sportradar (NASDAQ: SRAD) surged on Wednesday. Prior to that, shares of the sports betting data provider did a lot of nothing for an extended period of time. One professional money manager believes the stock’s best days are ahead.

Sportradar
Sportradar participating in a gaming expo. A professional money manager is bullish on the stock. (Image: Front Office Sports)

In an extensive Wednesday post on X (formerly Twitter), Radnor Capital — the pseudonym for a fund manager that wants to remain anonymous — said current sentiment on Sportradar stock could be similar to what was seen with DraftKings (NASDAQ: DKNG) a couple of years ago. That being a sound business model  attached to shares that don’t reflect fundamental strength.

My best guess (again, I’ve been wrong) is that sentiment around this stock mimics what Draft Kings was a couple years ago – people thought Draft Kings was a decent business but would never be a good stock because they would never get leverage on their massive customer acquisition costs. Draft Kings is up ~4x since that narrative was popular,” noted Radnor.

Radnor also owns shares of DraftKings. In terms of share price performance, it’s been a rough go for Sportradar since its September 2021 initial public offering (IPO). The stock’s final print for that month was $21.83. It closed at $10.60 yesterday.

Maybe Some Merit in DraftKings/Sportradar Comp

Sportradar and rival Genius Sports (NYSE: GENI) aren’t on the consumer-facing side of the sports wagering of industry. Rather, these companies pay sports league for data rights and sell that data to gaming companies such as BetMGM, DraftKings, and FanDuel, among others.

That makes Sportradar and Genius “picks and shovels” players. Due to the business model, Genius and Sportradar are tied to the growth of regulated sports betting, but they’re not as consumer spending-dependent as are traditional sportsbook operators. Still, the technology provided by these companies is essential in powering profit generators, such as live betting and same-game parlays (SGPs), for sportsbook operators.

Despite those favorable points, Radnor Capital observed that Sportradar has endured a “mechanical/ technical overhang” caused by a lack of liquidity in the shares and a small amount of institutional investors controlling more than 60% of the float. The fund manager noted other professional investors looking to express bullish views on sports betting have opted for cleaner stories like DraftKings rather than dealing with the complexities of Sportradar. Those preferences don’t diminish the data providers alluring long-term potential.

“Bull case math for Sport Radar suggests 2026 revenue could be ~$1.5 billion-1.6 billion (vs. street ~$1.3 billion-$1.4 billion) and almost $400 million earnings before interest, taxes, depreciation, and amortization (EBITDA) (vs. street ~$300 million),” added Radnor. “I get there using a ~20% revenue compound annual growth rate (which we have visibility into given the contracted nature of their business) and a ~25% EBITDA margin (low end of their 25-30% long term target). So even if we don’t get multiple expansion (which I find hard to believe, given the upside to numbers), the stock should theoretically compound with earnings growth >20%.”

Sportradar Can Handle League Fees

Sportradar and Genius find themselves in interesting positions. They’re in the middle of content providers (sports leagues) and consumers, which are accessed via sportsbooks. As such, some analysts have expressed concern that the data providers could be forced to overpay for league data and be vulnerable to not making up those expenditures through increased revenue with gaming clients.

Radnor noted that while rights costs tied to Sportradar’s relationships with the NBA and the ATP (tennis) increased, the company’s EBITDA margins remained flat, indicating the company was able to absorb the most costly part of those agreements without significant financial stress.

“These sports rights costs are straight line amortized over the life of the investment, so the costs will remain flat for the existing contracts, while the betting volumes grow, and more value-add products / services are offered to the sports books,” said the money manager. “Also means that year 1 of these almost 10 year contracts will be the least profitable. This will prove meaningfully accretive to margins, which should approach ~25% by 2026 (street ~22%) and ~30% longer term, from ~18% today.”