Welcome to the March 2021 newsletter for the Waterhouse VC Fund.
The Fund specialises in gambling assets and businesses that are related to the gambling industry. The industry is under-researched by most mainstream fund managers. We aim to leverage our unique expertise and existing assets to generate capital growth for investors over the long-term.
Since inception in August 2019, the Waterhouse VC Fund has achieved a total return of 1,323.61% (assuming the reinvestment of all distributions). The unit price is $14.23, as at 28 February 2021.
Winning permission to play
Following the US Supreme Court’s decision to overturn the federal ban on gambling in 2018, there are now 20 states with some form of legalised sports betting. Of these states, 14 have legalised online sports betting, with more states considering legislation in the near future.
For online gambling companies that want to start offering online sports betting or iGaming, it’s not quite as straightforward as applying for a license. Unlike many jurisdictions outside the United States, operators that want to offer online betting in a particular state must partner with casinos through market access agreements.
In New Jersey, for example, casinos with a sports betting license can run an online sportsbook under their own brand. Alternatively, through a market access agreement, they may authorise other operators to run an online betting platform on their behalf. Many other states follow a similar framework. Perhaps most importantly for operators, states that have legalised online gambling have also restricted the number of individual brands, commonly known as “skins”, that each casino can have under its umbrella.
So, in addition to the challenge of finding a casino partner to enter each state, operators must also compete for a finite number of partnerships available. With such a massive opportunity, this “land grab” stage in the US is a critical period for the long-term future of operators.
Skins in the game
PointsBet is an ASX-listed sports betting and online casino provider, with operations in Australia and the United States. They’re one of the few challenger brands that have made a dent in the ~40% combined market share of incumbents DraftKings and FanDuel (owned by Flutter Entertainment), a credit to their early market access, tech platform and excellent management team.
PointsBet has market access agreements in 12 states, including New Jersey (10.8% online market share), Illinois (8.9%) and Indiana (3.8%). They’ve also secured a five-year media partnership with NBCUniversal and appointed Shaquille O’Neal and Paige Spiranac as brand ambassadors.
US Betting Handle, State-by-state, January 2021. Total handle: $3.79 billion. Source: Sharp Alpha Advisors
While we have written about the scale benefits enjoyed by large incumbent operators, companies like PointsBet have many ways to compete and gain share. PointsBet has built their own wagering technology stack, which gives them control over their product roadmap and an edge over competitors who rely on third-party service providers. This was evident during Super Bowl LV, where PointsBet offered the most markets of any operator and saw zero downtime despite 12x the number of first-time betters on the prior year.
Further, PointsBet have leveraged their marketing experience from the competitive Australian market into efficient customer acquisition abroad. Their partnership with NBC shows that you don’t necessarily need mega scale to lock up prized national media. During the first half of FY21, PointsBet’s total turnover grew 255% to $1.89 billion, net win grew 177% to $82.8 million and active clients grew 107% to 211,000. In H2 FY21, the company plans to launch iGaming in Michigan and New Jersey, and explore opportunities in New York and Canada.
Another way to Play the US opportunity
PointsBet isn’t the only Aussie bookmaker looking to grab their slice of the US market. Following a recent $12.5 million capital raise that valued the business at around $140 million, PlayUp is looking to take their brand into the US through five market access agreements secured in New Jersey (launching soon), Colorado (live), Indiana, Iowa and Tennessee.
PlayUp Corporate History. Source: PlayUp Company Presentation June 2020
In the twelve months ending January 2021, the five states in which PlayUp is permitted to operate recorded a total handle of US$11.1 billion and revenue of US$782 million (according to Sharp Alpha Advisors). Of the longer-term opportunity, Flutter recently upgraded their estimate of the US iGaming and sports betting total addressable market (TAM) to US$20 billion by 2025, before even considering the significant opportunities in California and Florida.
Similar to PointsBet, PlayUp has taken the approach of developing and owning their own wagering technology platform, as opposed to outsourcing to third-party providers. This has allowed them to pursue a differentiated strategy, specialising in attracting VIP clientele. PlayUp prides itself on personalised customer service and custom-built player tracking designed to improve betting options. These factors have contributed to PlayUp’s Australian business achieving significantly higher Average Revenue Per User (ARPU) than its US peers.
PlayUp Financial Performance. Source: PlayUp Company Presentation June 2020
Owning your own platform is also beneficial in the context of the state-by-state legalisation and roll-out of online betting. It allows companies like PointsBet and PlayUp to be more nimble as they can customise their product to suit different states and regulations, while competitors using third-party providers are much more constrained.
If PlayUp’s management team can successfully execute on the US opportunity, then their current valuation could prove to be quite compelling. PlayUp has compounded revenue at 105% CAGR since 2016, albeit from a very low base. We estimate that PlayUp could generate $125 million of revenue in FY2022. At a current valuation of around $140 million, the business would be valued at just over 1X 2022 EV/Sales. If such growth is realised, PlayUp is likely to be revalued on a sales multiple that is more in line with peers.
PlayUp Peer Comparison. Source: Sentieo, as at 5 March 2021. *2021 Consensus Estimates Used. **Subject to Takeover Offer(s). ***Internal Estimate.
If things go well PlayUp might consider a public listing on either the ASX or NASDAQ. This is also likely to contribute to a valuation multiple expansion as PlayUp’s exciting growth story becomes better known.
For wholesale investors that want to follow gaming’s global growth, please follow us for updates on Twitter @waterhousevc.
Please note the above information in relation to PointsBet, DraftKings, Flutter Entertainment, Penn National Gaming, Entain, William Hill, Rush Street Interactive, Golden Nugget and PlayUp is based on publicly available information in relation to each of them and should not be considered nor construed as financial product advice. The Fund currently has a position in Flutter Entertainment and PlayUp, but not PointsBet. The information provided in this document is general information only and does not constitute investment or other advice. Readers should consult and rely on professional investment advice specific to their individual circumstances.