Sportradar: A Beacon Of Growth Potential (NASDAQ:SRAD)

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Sportradar (NASDAQ:SRAD) has suffered a 55% decrease since going public in September 2021 through no fault of its own. The company has posted solid revenues and EBITDA growth quarter on quarter but has been caught in the tech and gambling sector squeeze. We recommend SRAD as a buy and hold through at least the next three quarters to take advantage of industry tailwinds, the revenue share business model, and the company’s growing moat and economies of scale through advanced technology and outsourced trading.

Q2 Prediction

On May 18, 2022, Sportradar reported its first earnings of 2022. The company exceeded analysts’ EPS expectations of $0.03, weighing in at $0.04. The earnings call provided many areas of optimism, but there was one area of caution – namely the following statement by CFO Alex Gersh: “However in Q2, we are seeing increased impact of this crisis. We continue to monitor these developments very, very closely.”

This warning relates to the Russia-Ukraine conflict and the decreased revenue and EBITDA from their Eastern European business. CEO Carsten Koerl said the following during the above-mentioned earnings call:

But we definitely see that a couple of bookmakers stop to order some of the services or some of them have payment problems. That is why, Alex hinted to you, we will see some impact in quarter two. We keep the guidance and we are working very actively on mitigation.

It’s not surprising that Sportradar has customers in the region and, like many other companies, is looking for ways to plug this gap in revenue. However, they go on to say later that Sportradar doesn’t rely on any one region, but it is understandable for the market to have approached the stock carefully before the wider impact is known.

We have seen that since Sportradar went public on the NYSE, they are a stable company and are growing revenues quarter on quarter. We saw Q3 2021 at $158.7m, Q4 2021 at $172.2m, and Q1 2022 at $186.4m. We should expect a similar figure in Q2, which would still see an impressive increase from Q2 2021. Bearing in mind this possible Russia-Ukraine fallout and the typical lull in sporting matchups in these months, matching revenues in Q1 and Q2 would be a success. Regarding profitability, we should be looking for stability and a commitment to the same 20%-30% growth range as proposed during Q1 earnings.

U.S. Sports Betting on the Rise

DraftKings (DKNG) has been enjoying something of a renaissance in recent weeks, now sitting at a three-month high of $20.68; this, no doubt, is correlated with the price of Sportradar. The majority of U.S.-focused sports betting companies’ stock prices increase and decrease in unison, buoyed by the same legalization and increased margin trends. At the end of the day, while the sports betting companies are competing with each other, they all grow with the growth of the overall sports betting pie.

Sportradar, as a data provider to all these companies, also profits from the growth in the sports betting sector. In effect, what’s good for DraftKings, Rush Street Interactive (RSI), PENN Entertainment (PENN), and Flutter Entertainment (OTCPK:PDYPY) is by design good for Sportradar – especially when revenue share is considered. For instance, another quote from their Q1 earnings typifies their reliance on the win share of their customers:

A key change in our cash conversion is a move from a subscription model to a revenue-share model…While this offers us fantastic opportunity for growth, it also has a timing effect on our working capital and cash collection.

Sportradar provides services such as data, odds, video content, and outsourced trading (trading the prices and liquidity) to over a thousand clients worldwide. More and more, for these services they receive a revenue share of their clients’ gross profits on a monthly basis. Therefore, if DraftKings posts record profits from NBA matches, you can be sure Sportradar profits in turn. The measure of a quality data provider is the fact that such companies allow them to receive a revenue share rather than paying SaaS prices.

The favorable news regarding sports betting had been slow in 2021 with fewer legalizations than expected (especially in key states), but we are now seeing some movement. The governor of Massachusetts is expected to grant legalization as early as next week after a delay. In addition, the recent striking down of Prop 27 in California has finally put to bed the issue of who sports betting should favor – it is the tribes, and Sportradar already holds licenses at the tribal level. Meanwhile, in Texas, both candidates for governor have mentioned the possibility of legalization. Finally in Florida, there has been some back and forth with a decision from the court of appeals expected in 2023.

If Sportradar has been growing quarter on quarter without an influx of state legalizations, how will the market react if revenues suddenly increase significantly due to their customers’ increased overall betting turnover, leading to increased gross gaming revenue? Remember, Sportradar collects that increasing revenue share discussed earlier. In the U.S., the proof is in the numbers with a 124% increase year on year for Q1. With the markets opening up, companies need good products and Sportradar has this in spades.

Product Line on Trend

Sportradar has been on a recent run of announcements and there are no puff pieces to be seen. Just this month, Sportradar launched Virtual NBA, which is highly scalable and a product fit for the U.S. and overseas markets with, presumably, a revenue share included. In June, Sportradar premiered Orako, which serves as an all-in-one sportsbook solution bringing them higher up the value chain. These sticky products tie the company to its customers and add to the net dollar retention rate, which currently stands at 121%.

The CEO has referred to artificial intelligence as a “mega-trend,” and this gives a window into his priorities. AI is driving all products at Sportradar such as data collection, odds modeling, personalization and liability trading – and this can only be a good thing for margins and product portfolio. In particular, camera technology is an emerging trend for sports data and sports analytics, which not only assists margins in data collection but also drives better pricing in the odds models for their “Managed Trading Services,” or MTS.

Sportradar trades the odds and liabilities for its customers. In the hedge fund business, companies will typically charge a 2% management fee and a 20% profit share. Sportradar is trying to emulate this model with a direct revenue share from trading for its customers. MTS allows a sports betting company to completely outsource their operation and the revenues can be highly lucrative. It’s a win-win as their clients do not need to pay for expensive traders and Sportradar guarantees a greater winning margin.

In Q1 2022, Sportradar’s MTS grew 55%. Individualized EBITDA was not provided, but we can be sure there is a very strong margin associated with this product. So, if Sportradar’s products are as good as their marketing, we will see it in the revenues in Q3 and Q4.

Let’s Get Technical

Sportradar IPOed, with investor Michael Jordan ringing the opening bell, at $27 a share. As of Aug. 15, 2022, the price is a shade under $12.30. Has anything changed in their business plan, moat, revenues or profitability trend? Only positive changes stand out, such as the increased revenue share focus and growth in MTS. The tech sector taking a hit in early 2022, coupled with the Russia-Ukraine conflict and the prior headwinds of U.S. legalization, more than account for the slide.

Sportradar has enjoyed some price momentum in the last month, and I expect it to continue off the back of solid Q2 results pointing to a successful overall 2022. This thesis is corroborated by analysts who have placed price targets of anywhere between $14 and $25.

At 5.2x 2022 sales, this stock can never be called overpriced. I would support the valuation anywhere up to $20 based on its current growth trajectory.

I have created a DCF model or specifically “Discounted present value of future cash”.

We can calculate three scenarios:

Scenario 1 normal case:

Cash Flow 2022 -FCF	2023	2024	2025	2026	2027	2028	2029
51,532	61,838	74,206	89,047	106,857	128,228	141,051	155,156
				Terminal Value	Growth Rate
	2030	2031	2032	2032	20%	next 5 years		Based on historical 10-year EPS growth, average growth is 21.38%. Applied 15% to be conservative
	170,672	187,739	206,513	6,195,379	10%	5 to 10 years		Assuming growth starts to decline to an average of 8% due to maturity phase.
PV (10%)				2,388,587	10.00%	Discount rate		Assuming 10% return
INTRINSIC VALUE	2,388,587				30.00	Terminal multiple		Average Forward P/E of Software Application Industry.

Click to enlarge

Scenario 2 best case:

Cash Flow 2022 -FCF	2023	2024	2025	2026	2027	2028	2029
51,532	64,415	80,519	100,648	125,811	157,263	176,135	197,271
				Terminal Value	Growth Rate
	2030	2031	2032	2032	25%	next 5 years
	220,943	247,457	277,151	9,700,301	12%	5 to 10 years
PV (10%)				3,739,886	10.00%	Discount rate
Present value sum	3,739,886				35.00	Terminal multiple

Click to enlarge

Scenario 3 worst case

Cash Flow 2022 -FCF	2023	2024	2025	2026	2027	2028	2029
51,532	59,262	68,151	78,374	90,130	103,649	111,941	120,896
				Terminal Value	Growth Rate
	2030	2031	2032	2032	15%	next 5 years
	130,568	141,014	152,295	3,807,369	8%	5 to 10 years
PV (10%)				1,467,906	10.00%	Discount rate
Present value sum	1,467,906				25.00	Terminal multiple

Click to enlarge

Scenario	Probability	PV	Part
Scenario 1 (normal case)	0.6	2,388,586.96	1,433,152.18
Scenario 2 (best case)	0.2	3,739,886.04	747,977.21
Scenario 3 (worst case)	0.2	1,467,905.62	293,581.12
		Sum	2,474,710.51

Click to enlarge

This translates to a $2.47b market cap, which shows the current market cap of $3.65b to be a little rich for the normal case. However, this model does not take into account the change in tailwinds and all the trending products “clicking together.” Overall, there is certainly some upside moving into Q2 earnings.

There are, however, some risks to my investment thesis. Namely, Sportradar may not be able to achieve its promised revenues and profitability for a variety of reasons. First, legalizations again might not arrive fast enough for the market’s liking. Second, Sportradar’s investment in products may not lead to the expected revenue and profitability increases. Finally, there could be a reversal of the outsourced trading trends leading to a lessened revenue share.

Summing Up

Sportradar is a very interesting company regarding both their business model and types of services. They have delivered and surpassed analyst expectations until now, and there is every reason to keep faith that the sports betting industry will recover from the recent lows. In particular, since Sportradar profits from its customers’ successes, buying Sportradar stock is believing the industry will recover as a whole. Based on the shift in recent tailwinds regarding legalization and using technology and advanced trading to achieve greater margins, Sportradar is in the driver’s seat for strong stock price growth.

Buy and hold to see Sportradar and the industry deliver on its promise.