Gambling.com (GAMB) operates as an affiliate marketing business for various online gambling websites that are involved in iGaming and sports betting. The company earns revenue by referring people to other gambling websites. 65% of its revenue is recurring. We are bullish on GAMB stock.
Although GAMB has taken a beating recently, we think now may be a decent time to start considering a small long position. The sell-off started after its most recent report, which was released on November 18. The stock went from about $15 to under $10 within a few weeks, even though GAMB beat on EPS and revenue.
Perhaps the valuation was just too high at the time, or maybe the market didn’t like the fact that revenue was down sequentially. Undoubtedly, it has also been grouped with the speculative high-growth stocks that have been falling recently.
Regardless, now the price is much lower, and there are several reasons why we like GAMB; let’s break them down.
It’s no secret that online gambling is growing. According to the company’s investor presentation, global online gambling gaming revenue (GGR) was expected to grow from $65 billion in 2019 to $113 billion in 2025, a 10% compound annual growth rate (CAGR). That’s good, but the U.S. growth is the more exciting part.
In the same period, U.S. online GGR’s were forecast to grow from $2 billion to $16 billion, a 39% CAGR. After potentially reaching $16 billion in 2025, the U.S. market is expected to be worth $30 billion at “maturity” and $69 billion if every U.S. state legalizes online sports betting and iGaming.
A Growing Company
Gambling.com has seen great growth in the past. In 2017, the company had $11 million in revenue. In the last 12 months, it generated revenue of $42.3 million. Cash flow from operations also grew from $4.9 million in 2018 to $16.4 million for the last 12 months.
Most of GAMB’s revenue currently comes from the UK & Ireland and “Other Europe.” Specifically, the UK & Ireland segment made up 44.3% of revenue, and Other Europe was 26.8% in its most recent report, while North America was just 22.4%.
However, GAMB is now focused on expanding into the U.S. The North America segment saw 110% revenue growth year-over-year in GAMB’s Q3 2021 report. Recently, Gambling.com purchased Roto Sports, the operator of rotowire.com, a fantasy sports news and advice website. This will speed up its U.S. expansion plans and drive further revenue growth.
Roto Sports was purchased for $27.5 million, of which $7.5 million is deferred over the next two years. The purchase price represents a 4x sales multiple for Roto Sports’ estimated 2021 revenue. Furthermore, the acquisition is expected to be immediately accretive to fiscal 2022 earnings.
The company expects to keep growing along with the overall online gambling market. Here’s what the company’s CFO said in the latest earnings call:
“For the years 2021 to 2023, we are targeting our average annual revenue growth to exceed 40%. In our European business, we target growth faster than [the] European gambling market over a business cycle. In the United States, we expect to take market share and be significant after in the markets over the longer term.
At the same time, we are targeting an average annualized adjusted EBITDA margin of no less than 40%. It is important to note that our adjusted EBITDA margin may deviate from that target from quarter to quarter due to seasonality and due to investments to support organic growth, primarily focused on the U.S. markets.”
Analysts also expect high growth from the company. They forecast that the company will generate revenue of $62.8 million (44% growth) and free cash flow of $22 million (64% growth) in fiscal 2022.
Due to the nature of its business model, GAMB is highly profitable, which is refreshing to see in an industry full of money-losing companies like DraftKings (DKNG), for example.
GAMB’s cash return on invested capital (CROIC) for the last 12 months is 24%, its return on equity is 37%, and its gross profit margins are 100%. It doesn’t really get better than 100%. This is indicative of a highly profitable company, which is exactly what we like to see.
Founder-Led Company with High Insider Ownership
Gambling.com is led by co-founder and CEO Charles Gillespie. The other co-founder is Kevin McCrystle, who is the chief operating officer of the company. This is important to us because studies have shown that founder-led companies tend to outperform the market over time, due to various factors such as founders having more passion and being more innovative.
To top it off, insiders own 62% of the company (the CEO owns about 14.9%), indicating that insiders’ best interests are aligned with shareholders.
There are a few ways to quantify a company’s competitive advantage using only its income statement. One method involves calculating the earnings power value (EPV).
Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value can be measured using total asset value. If earnings power value is higher than reproduction value, then a company is considered to have a competitive advantage.
For Gambling.com, the calculation is as follows:
EPV = EPV adjusted earnings / WACC
$144.2 million = $12.98 million / 0.09
It is important to note that EPV adjusted earnings are adjusted for a no-growth environment. Essentially, it’s an estimate of profitability if the company were to choose to stop reinvesting in growth.
Since Gambling.com has a total asset value of $91.65 million, we can say that it indeed does have a competitive advantage based on this formula. In other words, assuming no growth for the company, it would require $91.65 million of assets to generate $144.2 million in value over time.
Using the analyst estimates for 2022 mentioned earlier, GAMB trades at a forward price/sales multiple of 5x and a forward price/FCF multiple of 14.4x. This is pretty cheap for a high-growth company with 100% gross profit margins and 32.6% free cash flow margins.
There are regulatory risks in the gambling industry that are likely dragging the multiple lower; however, we think it deserves a higher valuation because of its high profitability, competitive advantage, and growth.
Wall Street’s Take
Turning to Wall Street, Gambling.com has a Moderate Buy consensus rating, based on just one Buy rating assigned in the past three months. Gambling.com’s price target of $16 implies 71% upside potential.
Although only one analyst has assigned a price target in the past three months, five months ago, two analysts assigned price targets of $13 and $11, implying 39% and 17.7% upside, respectively. More price targets should come in eventually, as the company only recently IPO’d in July 2021.
Gambling.com stock is an interesting way to get exposure to a growing industry without having to buy into expensive, money-losing companies. The company is highly profitable and is growing quickly, has a low valuation, seems to have a competitive advantage, and is founder-led with high insider ownership.
If you’re considering purchasing the stock, there are two things you need to keep in mind. The first is the regulatory risks involved with online gambling, and the second thing is that the stock is currently in a downtrend, which suggests that it can keep trailing lower for now. For this reason, we are only taking a small long position until the stock’s trend flips bullish.
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Disclosure: At the time of publication, StockBros Research had a position in GAMB stock.
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