Sportradar: Attractive Upside With Steady Fundamentals (NASDAQ:SRAD)

Sportradar (NASDAQ:SRAD) is a global leader in sports data and intelligence, providing a range of solutions to the sports industry, media companies, and sports betting operators. Headquartered in Switzerland, the company operates in over 115 countries with 1,790 customers as of December 2022 and holds partnerships with dozens of leagues, federations, and rights holders, including the NBA, NHL, and MLB.

The company went public on NASDAQ in 2021 at a $27 price per share on debut day. However, shares have traded lower and lost over half of their value since then. Over the past year, market sentiment has not seemed to improve. Today, SRAD trades in the $10 range, already down almost 7% YTD.

I initiate my coverage with a buy rating. My modeled target price indicates that SRAD is undervalued at its current price of approximately $10.

Catalyst

Overall, SRAD has good fundamentals. Balance sheet is strong, with over $306 million of cash and short-term investments as of Q3. Liquidity position, however, is even stronger:

Turning to liquidity, we ended the quarter with liquidity of €510 million. This was comprised of €290 million in cash and cash equivalents, up €29 million or 10% quarter-on-quarter, and a €220 million revolving credit facility with no amounts outstanding. Given our solid liquidity position and our focus on delivering long-term value to our shareholders, we are reviewing several options to enhance our capital allocation.

Source: Q3 earnings call.

With revenue growth mostly in the high teens and mid-20s since going public, I believe that growth performance is quite solid for a company that is on track to potentially reach a billion dollars of revenue between the next 12 – 24 months. In FY 2023, SRAD will expect to generate between $870 million – $880 million in revenues.

Though net earnings have been choppy, SRAD has consistently been a cash-generating and adjusted EBITDA-positive business.

As I looked into the overall expectation of the management to achieve 20% revenue growth and 20% adjusted EBITDA growth for FY 2024, I found that the expectation could be achievable, given some potential identifiable catalysts.

Given SRAD’s business model that generates a large part of its revenues from revenue-sharing agreements with operators, I expect the increasing adoption of SRAD’s Alpha Odds product in FY 2024 to help improve monetization from the MBS segment, effectively boosting SRAD’s top-line growth:

MBS Revenue includes Managed Trading Services (“MTS”), Managed Platform Services (“MPS”), and Vaix Marketing Services. MTS revenue consists of the percentage of winnings and fees charged to clients if a “bet slip” is accepted and successful. MPS revenue consists of platform set-up fees for our turnkey solution. MPS is part of our MBS business and provides a complete turnkey solution (including platform set-up, maintenance and support) to our clients. The platform set-up fee is recognized over the time the platform is built. Maintenance and support fees are recognized on a monthly basis or on the basis of actual performance for revenue share arrangements.

Source: 20-F

MBS represents the portion of SRAD’s revenue from the revenue-share agreement with operators. As of 2022, MBS remained SRAD’s second-largest and second-fastest-growing revenue stream. At around €170.8 million in 2022, it made up over 18% of the revenue and nearly doubled from just €46.6 million in 2020.

As we have learned in Q3, headwinds for SRAD’s revenue-sharing partners could present a considerable setback for SRAD. In Q3, SRAD missed its revenue guidance for only the second time since going public, due to betting operators outside the US experiencing some margin pressure:

Second and, more recently, in Q3, betting operators, especially those outside of the U.S. have experienced margin pressure, primarily to live betting and soccer due to winning streak of bettors, with more favorites winning and Goldrich games during the start of the European Football season. This contributed to softness in our Q3 MTS results and our outlook for the rest of the year, very participate in our sports betting clients’ revenues

Source: Q3 earnings call

Meanwhile, Alpha Odds is an AI-powered tool that helps SRAD’s revenue-sharing operators price their bets more effectively to increase their revenue. Launched only in 2022, it was proven to deliver a 10% profit increase for SRAD’s clients in 2023. With only over 60 clients adopting Alpha Odds as of the start of the year, or about a 3% product penetration rate, there is room for increased adoptions in 2024.

Another catalyst that should continue to boost SRAD’s growth is the increasing legalization of sports betting across more US states. Since 2020, US revenue has been the fastest-growing segment for SRAD, with annual revenue almost tripling as of 2022. The latest development in the US sports betting market as of December 2023, which teased the idea that Texas – the second-most populated US state – may be opening up soon, should present as a potential attractive catalyst to watch:

The case for legalizing sports betting in Texas appears to be solid. Thirty-seven states in the U.S. have launched legal betting markets in the past five years, including some close neighbors to Texas that are padding their tax coffers. Meanwhile, Eilers & Krejcik Gaming estimated that over $6.2B in illegal bets are placed every in the Lone Star state.

Source: SA

Risk

In order to reach its profitable growth agenda for FY 2024, SRAD has launched a major cost optimization initiative to reduce the 2023 labor cost run rate by 10%. However, I believe that there is a risk that operating expenses, especially personnel expenses, will remain sticky.

Personnel expenses have been roughly 37% – 38% of revenue in recent times. Even in Q3, when revenue only grew over 12%, personnel expenses were still 37% of revenue. I believe that this raises concerns about SRAD’s ability to achieve its ambitious 20% FY 2024 revenue growth target while maintaining ongoing cost optimization efforts. In fact, the management has acknowledged this as a risk factor in the latest earnings call:

Yes, obviously, I’ll start with profitability, and I’m going to give you an Irish answer – so apology. But if we decide to not focus on managing our operating costs and we see a gradual creep back in our employee base in terms of our labor costs, you know, that would obviously impact the level of operating leverage that we believe we can deliver in 2024 and beyond.

Source: Q3 earnings call

In such circumstances, I am of the view that share-based compensation / SBC may also remain elevated at a similar level seen in Q3, creating a risk of higher share dilution, driven by SRAD’s objective to also grow adjusted EBITDA by 20% in FY 2024. In Q3, SBC made up over 22% of SRAD’s adjusted EBITDA, compared to 19% in the previous year, essentially allowing SRAD to book a higher adjusted EBITDA margin despite lower earnings in Q3.

Valuation/Pricing

My target price for SRAD is driven by the following assumptions for the bull vs bear scenarios of the FY 2023 projection:

1. Bull scenario (50% probability) assumptions – SRAD to achieve the high end of its FY 2023 guidance of €880 million of revenue, representing a 21% growth. I also project SRAD to successfully achieve its FY 2024 goal of 20% revenue growth, delivering €1 billion of revenue. I believe that the performance would reward SRAD with a 6x P/S, a premium to 5.6x P/S, where it is trading currently.

2. Bear scenario (50% probability) assumptions – SRAD to see €870 million of revenue, a 19% YoY growth, in line with its lower-end guidance for FY 2023. SRAD is to deliver a revenue of €974 million in FY 2024, a 12% growth. I would expect growth to slow down in FY 2024 due to the cost optimization initiative. I assign SRAD a P/S of 3.4x, a considerable contraction from the current level. SRAD last traded at 3.4x P/S in September 2022, when revenue growth was in the mid-teens.

Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $15 per share, suggesting an over 46% upside from the current price level. I rate the stock a buy. At the $10 price level today, I believe that SRAD is undervalued.

Conclusion

Despite its leading position in sports data and intelligence, SRAD’s share price has floundered since its IPO, currently trading at $10, down 7% YTD and 63% from its debut price. However, I initiate coverage with a buy rating. My target price model suggests SRAD is undervalued, presenting a potential buying opportunity. The potential success of its AI-powered pricing tool, Alpha Odds, and further growth in the US market, could be key to unlocking 20% revenue growth expectation in FY 2024.