Gaming small-cap a good bet, says Ausbil

Online betting company Pointsbet Holdings (ASX: PBH) shares have risen more than three-fold in 12 months, but profitability remains in the red, almost two years after its ASX listing. But the catalysts for growth outweigh the risks, says Ausbil Investment Management portfolio manager Mason Willoughby-Thomas .

He’s not overly concerned by the negative numbers tabled by Pointsbet management today, including a statutory loss of $85.6 million for the half, up from a $32.2 million loss a year earlier.

By the numbers

• Pointsbet's statutory loss of $85.6 million for 1H 2021 was more than double the $32.3 million loss of a year earlier
• Four-times the turnover on its platform was generated during Superbowl 2021 versus the same event last year
• US$ 500 million: the five-year revenue opportunity opened up by Pointsbet’s 2020 tie-up with NBC Universal
• 180 million: the number of new customers the above deal added to Pointsbet’s books

“The key performance indicator for us is that they’ve continued to add to their customer base,” says Willoughby-Thomas.

“It’s a company where loyalty is fleeting, and so churn is naturally very high, with management needing to continually invest in marketing spend.”

The company’s fast-growing North American operations added more than 68,000 active clients in the year to 31 December 2020 – up 220% year-on-year. And the Australian and New Zealand business grew 77% to almost 143,000 active clients.

Spend money to make money

As a market segment with high levels of competition and low switching costs – there’s little stopping gamblers jumping between a raft of different sports betting companies – marketing spend is generally accepted as an unavoidable cost of doing business.

“And as a company that’s in an early phase of penetrating into North America, you need to spend heavily.”

In the second half of last year, Pointsbet raised US$393 million to fund a landmark partnership with large incumbent NBC Universal. It also inked a deal with new brand ambassador, former marquee NBA player Shaquille O’Neal.

Were there any surprises in the result?

“Talking to people around the market, the level of spend was a little bit of a surprise, it was a bit higher than was expected, particularly on the marketing and headcount costs,” says Willoughby-Thomas.

“But that’s indicative of the opportunity that’s ahead of them, with the momentum quite strong in the markets they’re in.”

He says it’s important for Pointsbet, having broken into the highly competitive but extensive market of the US and potentially Canada later in the year to “strike while the iron is hot and to build on that momentum.”

Moving into North America in 2018 opened up an exponentially larger addressable market. And while Willoughby-Thomas anticipates earnings losses from the company for some time yet, “the pot of gold at the end of the rainbow is pretty large”.

Management is targeting around US$500 million in revenue over the next three to five years – based on a 10% share of a five- or six-state US market worth an estimated total of between US$5 billion and US$6 billion.

What were the highlights of the result?

The rising client volumes are a standout for Willoughby-Thomas, also singling out the headline annual North American sporting event, Superbowl 2021. Given the scale of viewership, it was a big test of the Pointsbet platform, which processed four-times the turnover during Superbowl 2021 relative to last year’s event.

“But their backend was able to handle that increase in volume without downtime or outages, and was a good test for the robustness of their technology stack,” he says.

Willoughby-Thomas is also buoyed by the firm’s recent rollout of new products, including multi-bets and in-play betting features. 

And he regards Pointsbet’s fourth-quarter 2020 deal with NBC Universal as something of a coup; a huge vote of confidence in the relatively small company.

“Another thing I like about it is it’s very catalyst-rich,” says Willoughby-Thomas. The firm entered strategically important US states including Illinois and Colorado during the half, and also moved into Illinois, where NBC Universal enjoys a strong presence.

Pointsbet management is also eyeing the lucrative Canadian market with a potential launch in Ontario later in the year. Ontario's combined sports betting and gaming market potential is worth around US$2 billion a year.

Do you hold a position in Pointsbet? And if so, how has this changed in recent times?

Ausbil’s small- and micro-cap strategies maintain sizable positions in Pointsbet, having bought in soon after its IPO’s in mid-2019.

The company ranks among the top-10 holdings of Ausbil’s Australian Small-Cap Fund. It is also a top-performer in the Ausbil Micro-Cap Fund, returning more than 31% during January – a month that also saw Pointsbet break into the ASX 200.

“When the birds are chirping, sometimes you’ve got to feed them”

“We got in not long after the IPO. We’ve traded around a little bit, but we have a core holding,” says Willoughby-Thomas.

“When the stock popped above $16 a share in late January, we sold a bit, and we'll look to top up again on any share price weakness.”

As part of a growing cohort of technology-heavy companies that have captured investor sentiment despite yet turning a profit, he concedes the share price has been volatile. But insists his team are investing for the long-term.

“We see it as a unique opportunity in a big market. And as an early mover, we think the outlook is quite positive.”

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Throughout February, my colleagues Bella Kidman, Patrick Poke, Nicholas Plessas, Mia Kwok and Angus Kennedy will publish similar Q&As on Livewire readers' most-tipped big caps and small caps. Hit FOLLOW on our profiles to be notified when these wires are published.