What's the idea?
- Sportradar is at the forefront of the rapidly expanding sports betting market, driven by organic growth and increasing legalization in the US.
- More than 34 states have already legalized some forms of sports betting, and others plan to launch sports betting sites before the end of 2023.
- Sportradar has a unique business model characterized by sustainable growth and significant potential to improve operating leverage.
- We believe the sports data industry will become a concentrated market dominated by a limited number of players.
- Sportradar is likely to be one among the big winners with a large market share, as the company has several competitive advantages.
- Given the largely paper-based nature of some operating expenses, we expect Sportradar to continue improving profitability over the long term.
- Sportradar’s only direct competitor, Genius Sports, is growing at a slower pace and is still far from breakeven, but is trading at comparable levels to SRAD.
- According to the Wall Street consensus estimate, the stock has an upside potential of 60%.
Sportradar Group AG (SRAD) provides software and a wide range of sports data to the betting industry, leagues and federations, and media companies. The firm provides data to bookmakers under the Betradar brand and to the international media industry under the Sportradar Media Services brand. The company was founded in 2001 and is headquartered in St. Gallen, Switzerland.
Why do we like SPORTRADAR GROUP AG?
Reason 1. Target market potential
Sportradar is at the forefront of the rapidly growing sports betting market. According to Statista, the US online sports betting market is estimated at around $7.62 billion and is expected to reach $14.44 billion by 2027, implying growth at an impressive compound annual rate (CAGR) of 17.3% during the forecast period. Analysts at Goldman Sachs have even bolder expectations: the investment bank predicts that the online sports betting market will reach $39 billion by 2033 in the US alone.
Although the US is one of the most dynamically growing regions for Sportradar, the country accounts for only 18% of the company’s revenue (13% in 2021, 8% in 2020). Sportradar is a global player and serves 1,790 customers in over 115 countries. According to Grand View Research, the global online sports betting market is estimated at $83.7 billion and is expected to grow at a CAGR of 10.3% through 2030, reaching around $183.3 billion at the end of the period.
Expected dynamics of the global sports betting market
Moreover, the most dynamic segments with the largest market shares are likely to be basketball and baseball, sports widely played in the US. The fast US market dynamics are due to the active legalization process started as a result of the May 2018 US Supreme Court decision, which gave states the authority to independently determine the legal status of online sports betting in their territory. As a result, more than half of the US states have begun the process of legalizing sports betting.
Legal status of online sports betting in the US, by state
Since 2018, online betting has been legalized in more than 30 states, including economic giants such as New York, Florida, Illinois, and Pennsylvania. Currently, more than 34 states have legalized some forms of sports betting, and others plan to launch sports betting sites before the end of 2023.
Legalization is expected shortly in the states of Maine, Nebraska, North Carolina, and Vermont. Lawmakers are also seeking to legalize gambling and sports betting in Hawaii. In Alaska, a similar bill proposed in 2020 was supported by the governor, but it expired due to the pandemic. In Texas, a legalization vote is expected in November, while in Florida, where betting was legalized in 2021, the first betting sites are scheduled to launch in the autumn, in time for the opening of the football season.
Reason 2. Unique business model
Sportradar has a unique business model characterized by sustainable growth and high profitability. The company's solutions are based on its technology platform, built on huge amounts of data. Sportradar buys data and video from sports leagues such as NBA, MLB, NHL, FIFA and NASCAR, processes that data with its own know-how, and then sells analytics and visualization to sports leagues and media companies. It also provides mission-critical solutions to operators of sports betting platforms.
Sportradar business model
The significant amount of accumulated data and the patented technology for analyzing it allow Sportradar to provide comprehensive solutions across the entire sports betting value chain, from traffic generation to data collection and processing, odds calculation, trading risk management on behalf of clients, and visualization. The company offers solutions within three segments:
RoW Betting. The segment reflects revenues from the sale of betting data, entertainment tools, managed betting services (MBS), and e-sports solutions to customers outside the US, including the UK, Malta, and Switzerland. RoW Betting accounted for 53% of the company’s total revenue at the end of 2022 (55% in 2021, and 58% in 2020).
RoW Audiovisual. The segment represents revenues generated from online streaming, mobile, and retail sports betting solutions from customers outside the US. RoW AV accounted for about 22% of Sportradar's revenue in 2022 (25% in 2021, and 26% in 2020).
The US. The segment reflects the company's revenues generated in the US. As noted earlier, the segment accounts for 18% of total revenue. However, the share is steadily growing.
Sportradar generates revenue primarily through two types of contracts: subscriptions and revenue sharing. Subscription solutions make Sportradar's business model similar to that of software-as-a-service (SaaS) companies, providing the firm with stable and predictable cash flow. At the same time, revenue-sharing contracts allow Sportradar to benefit from growing betting volumes around the world.
Similar to SaaS businesses, Sportradar's unit costs should decrease as the business expands because the data it offers is easily scalable. Over the past three years, from 2020 to 2022, adjusted EBITDA margins have declined steadily, driven by significant investments in infrastructure, content, technology, and organization in strategic markets, including the US. However, we expect the unique business model to allow Sportradar to improve operating leverage as it grows.
Reason 3. Deep competitive moat
We believe that ultimately the sports data industry, similar to the financial data industry, will become a concentrated market dominated by a limited number of players, because provider unit costs are likely to decrease as businesses expand, while switching costs for sports betting operators and other customers will be too high. Sportradar is likely to be among the big winners with a large market share as the company has several strong competitive advantages:
Package solutions provider with global presence. The firm's broad offering and global reach enable it to serve sports betting operators of all sizes and needs, with all solutions in one place and from one source. We believe that the ability to provide betting companies with a full range of solutions positions the firm well in new growing markets such as the US.
Loyal customer base. The value proposition has allowed Sportradar to build a strong customer base. Over the past three years, the number of the company’s customers has grown from 1,612 to 1,790, while the net retention rate of the 200 largest customers, generating approximately 76.4% of revenue, was 119% at the end of 2022. A retention rate above 100% indicates that a company is growing along with its customer base. It is worth noting that Sportradar’s average duration of cooperation with largest clients is 10.3 years.
The largest data portfolio in the market. Sportradar has the largest product portfolio among its competitors, including both data from Tier 1 leagues such as NBA and NHL, and data from smaller regional leagues such as NBL and AFC. An extensive database spanning over 20 years gives the company a competitive advantage in odds generation and virtual sports content creation.
Strong relationships with sports leagues. Sportradar has built strong relationships with over 350 leagues and federations in 38 sports around the world. The company has exclusive rights to betting data for NBA (worldwide, excluding the US and China) and NHL (including the US), as well as exclusive worldwide media rights for NBA, NHL, and MLB (including the US). In addition, Sportradar has exclusive rights to global match betting data for UEFA, the International Tennis Federation (ITF), the International Cricket Council (ICC), and Formula 1, as well as exclusive rights with the German Football League (DFL).
It is worth noting that Sportradar can benefit greatly from network effects. The more betting operators and media companies the firm attracts to the platform, the wider its global reach will be. This, in turn, attracts new sports leagues to partner with Sportradar, who provide the firm with additional data to add value to its solutions.
Sportradar's financial performance over the trailing twelve months (TTM) can be summarized as follows:
- Revenue amounted to €809.1 million, up 10.8% from the end of 2022. The largest growth of 18.0% was in the US segment.
- Operating profit increased from €27.3 million to €28.3 million. Operating margin decreased from 3.74% to 3.50%.
- Net loss amounted to -€13.6 million against a profit of €10.5 million at the end of the year. The decrease was primarily due to the revaluation of assets and other operating expenses. Net margin declined from 1.44% to -1.69%.
Dynamics of the company's financial results
Company margin dynamics
Sportradar's financial results in Q2 2023 are presented below:
Revenue grew by 22.1% YoY: from €177.2 million to €216.4 million. The US segment rose by 30.6% YoY.
Operating profit decreased from €12.1 million to €8.2 million, due to the revaluation of assets and other operating expenses. Operating margin fell from 6.82% to 3.78%.
Net profit amounted to €0.1 million versus €22.8 million a year earlier. Net margin decreased from 12.88% to 0.04%.
Dynamics of the company's financial results
In Q2 2023, Sportradar demonstrated significant potential for improvement in operating leverage. In the previously unprofitable US segment, adjusted EBITDA margin reached 14% versus -19% a year earlier. Thus, the company confirmed our previous thesis about the scalability of its business model. Given the largely paper-based nature of the net loss, we expect Sportradar to continue improving profitability over the long term.
The company's management confirmed its 2023 guidance, according to which revenue will amount from €902 million to €920 million, implying the YoY growth in the range of 24%–26%; Adjusted EBITDA is expected to grow by 25%–33% to €157 million–€167 million, with adjusted margins expected to reach 17%–18%.
Sportradar's TTM cash from operations stood at €213.9 million, compared to $168.1 million for the year. Free cash flow increased from €5.5 million to €26.0 million over the same period. Despite the insignificant free cash flow, Sportradar is not a capital-intensive business, since most capital expenditures are in intangible assets, such as the purchase of new data. Such investments are essential because they provide a competitive moat for the company. Over time, Sportradar is able to grow free cash flow because it does not require significant additional investment to scale its offering once the necessary data is acquired.
Company’s cash flow
Sportradar has a strong balance sheet: total debt is €22.3 million, cash equivalents and short-term investments account for €263.7 million, and net debt is deeply negative at -€241.5 million.
Our comparable sample includes direct competitor Genius Sports and other players in the sports betting and gambling market. Sportradar is trading at a discount to the average at the following multiples: EV/Sales — 3.28x, EV/EBITDA — 12.07x, P/Cash flow — 13.51x.
It's worth noting that Sportradar’s only direct competitor, Genius Sports, is several times smaller than Sportradar, has lower growth rates, and is still far from breakeven, but trades at a comparable EV/Sales multiple.
The minimum price target from investment banks set by Morgan Stanley is $13 per share, while Craig Hallum estimates SRAD at $25 per share. According to the Wall Street consensus, the stock’s fair market value is $16 per share, implying a 60% upside potential.
Price targets of investment banks
- Sports leagues with which Sportradar has agreements often also provide data and statistics to other companies, including other sports analytics platforms. If Sportradar is unable to renew contracts on commercially acceptable terms and find suitable alternatives, the company may lose its competitive advantage.
- Sportradar operates in a highly cyclical industry. There is a possibility that slowing economic growth and deteriorating consumer sentiment will have a significant impact on the firm's operations. In this case, the Sportradar stock could remain under pressure for an extended period of time.