In investing, the “house” does not always win because some betting companies may be unprofitable or suffer from quantitative and qualitative pitfalls. For the odds to be favourable, investors should stake their bets on companies with favourable financials. To assess whether a company has favourable financials, investors should attempt to understand the business first by conducting qualitative analysis, followed by quantitative analysis, or vice-versa. The most crucial aspect for investors is to judge whether the particular company or industry is suitable for their risk profile and not invest in a company simply because it is “cheap” or “undervalued”, as these are relative and subjective terms.
The Edge Singapore has filtered companies for investors wishing to gain exposure in the online and sports betting industry. The list of stocks excludes large casino and entertainment companies, as generally, a portion of the revenue and income generated is derived from nonbetting segments such as hotels, malls, and other entertainment. Mainly, the two companies that manage horse racing and betting are Nasdaq-listed Canterbury Park Holding and Churchill Downs. The rest of the companies have some exposure to horse, online, or sports betting.
Table 1 is a purely quantitative scoring table of 20 globally listed companies in the online and sports betting industry that are investable. The scoring table considers the following six quantitative aspects:
- Historical performance, which looks at the company’s historical financials over the past 10 years or since inception, where discounts are given for poor performance and inconsistency;
- Profitability, which looks at profitability ratios such as return on equity, return on assets and margins;
- Yields and valuation, which compares the company’s fundamental yields against the risk-free rate and its relative valuation to peers;
- Financial safety, which examines the company’s balance sheet, comprising of liquidity and solvency ratios, the quality of its shareholder equity, and any external credit rating on the company;
- Sentiment, which looks at analyst ratings and forward price ratios on the company;
- Price-to-value analysis, which compares the price growth to the weighted value growth over multiple periods. This weighted value includes revenue, net income and cash flows in ascending order.
Investors who intend to buy any undervalued companies should also examine the qualitative aspect of these businesses before investing in them. From the scoring table, Stockholm-listed Evolution AB is the top-scoring company and is the only strongly undervalued company on the list.
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Evolution develops, produces, markets, and licenses fully integrated live casino solutions to online casino operators. The company’s customers include prominent online gaming operators worldwide and several land-based casinos that have expanded online. Evolution’s revenue model consists of commission fees and fixed fees for dedicated tables, which are paid monthly by operators. Dedicated table fees are monthly service charges to operators who have opted to provide dedicated tables for their end users. The key segment in Evolution’s business is its live casino, which contributes more than 80% of its revenue.
The shift from bricks-and-mortar casinos to online casinos over the past few years is a favourable tailwind for Evolution. The tremendous growth of online casinos is supported by newly regulated markets and evolving consumer preferences. Technological advancements, such as the adoption of mobile technology, make it convenient for players to access online casinos and engage in online gambling. The live casino business allows operators to differentiate themselves in the marketplace, as it offers considerable opportunities to be flexible in customising the content and experience it provides to end users, compared to land-based casinos. This has aided Evolution’s competitive advantage in the industry, reflected by growing margins over the past 10 years, as illustrated in Chart 1.
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Most market intelligence sources project that the global online casino market size will grow at a low double-digit CAGR from 2024 to 2030. A case can be made for Evolution to grab the potential addressable market, as its business strategy revolves around gaining early market share in new and re-regulating markets. Further, given Evolution’s target of growing faster than the total global online casino market, the company is also carrying out M&A, such as the most recent offer in July this year for Galaxy Gaming, a leading developer and distributor of casino table games and gaming technology solutions. Given the successful and innovative games Evolution has developed and its market-leading sophisticated platform that is scalable and adaptable to new markets, we think Evolution’s odds of executing its business strategy are poised to be favourable.
We have also done a deeper quantitative analysis of Evolution to determine the company’s intrinsic value. Several types of analyses were done, of which a range of valuations are given for the best and worst-case scenarios for each analysis. Each analysis type is then weighted to arrive at the final intrinsic value for the company. Chart 2 shows the overview of Evolution’s valuations while Chart 3 shows the price to intrinsic value for the company. The different types of analysis include a discounted cash flow (DCF) analysis, followed by a sensitivity analysis, which considers the sensitivity of the share price to a change in company fundamentals. The margin of safety analysis examines and discounts items in the balance sheet. In contrast, the comparables analysis looks at relative valuations to peers regarding discounts or premiums and fundamental ratios such as P/E and EV/Ebitda. The divergence analysis or price-to-value analysis, compares the growth in price to the increase in value of the company, which comprises revenue, profits, and cash flows.
Sentiment-wise, analysis have given an average target price of over 35% above its current trading price of SEK996 ($124), with nine “buy” calls, five “hold” calls, and one “sell” call. Based on our valuation, Evolution’s intrinsic value is SEK1,369.
Disclaimer: This article is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This article does not take into account an investor’s particular financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor's own discretion and/or after consulting licensed investment professionals, at their own risk.
