GAN Limited: A Small-Cap Online Gambling Pure Play With Big Potential

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Investment Thesis

GAN Limited (NASDAQ: GAN) will see strong gains as it continues its incredible growth into 2020. With its well-proven GameSTACK platform, GAN can become an industry leader as the need for digital transformation continues to grow for US casino operators.

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Company Overview

GAN Limited is a UK-based provider of enterprise Software-as-a-Service solutions for online casino gambling, also known as iGaming, applications, as well as online sports betting. Its “GameSTACK” platform is an end-to-end solution that allows GAN’s customers to rapidly launch and grow their online operations. GameSTACK also includes GAN’s patented “iBridge” framework, which allows for the integration of a casino’s on-property rewards and loyalty program with the internet gambling experience. GameSTACK is currently deployed in Europe and the US. However, the bulk of revenues were generated in the United States, with the largest customer being FanDuel. In return for the usage of its platform, GAN receives recurring service fees as well as an agreed-upon percentage of net revenue generated on the platform. On May 8th, GAN debuted on the NASDAQ, and it was previously was listed on the London Stock Exchange.

Summary of Current Financial State

GAN’s recent financial results are a sign of the company’s massive potential. In 2019, GAN saw a 114% increase in yearly revenue from 2018, much of which is recurring. A major plus to GAN is that the large majority of its costs are fixed, which is largely attributable to the nature of SaaS companies in general. This cost structure plays well in GAN’s favor, and with no glaring need for major capital expenditures in the near term, this should further boost growth. To illustrate this point, in 2019, this fixed cost structure acted as a multiplier by increasing total annual gross profit more than 7-fold and bringing adjusted EBITDA that was a negative $1.7 million for 2018 to a positive $8.4 million. As for GAN’s credit health, it boasts a quick ratio of 1.64 and a total debt/revenue ratio of 0.04, according to CapitalIQ. This is more than healthy and puts GAN in a better spot to expand in 2020 and beyond.

Though the company has not yet announced earnings, I believe it will show strong gains despite COVID-19. Just to be clear, I don’t think that GAN’s 2019 growth will repeat itself due to it being inflated by FanDuel’s increased usage of GameSTACK. However, I do believe that growth will continue at a strong pace for reasons I will explain in the following sections.

Valuation-wise, the company currently has an EV/Revenue multiple in the low teens. This is very attractive considering the potential and rapid growth of the company. Given GAN’s cost structure, I believe that EV/Revenue is the most appropriate in this case.

(Source: May 2020 Prospectus)

GAN’s Platform Offers Struggling Casinos a Life Raft in a Time of Crisis

For many casino operators, GAN’s GameSTACK platform will become only more appealing as lockdowns force the company to rethink its business model. Many of the most affected casino operators have been smaller, land-based commercial and tribal casinos with no exposure to the rapidly growing iGaming market. The financial and time costs of developing an in-house iGaming platform are great and may not be feasible for many operators. This is where I see a massive opportunity for GAN due to its ability to quickly launch and scale an individual operator’s online presence, giving operators a chance to remain in front of their customers and survive in a time of crisis.

There is no doubt that iGaming has been expanding due to casino closures. Pennsylvania, a state GAN is licensed to operate in, has seen iGaming revenues increase significantly month after month and recently showed impressive April results. This only increases the attractiveness of beginning iGaming operations from a casino operator perspective. With this looking like a sign of a more permanent trend towards digital transformation, it is a wave worth hopping on from an investor perspective. In 2019, total casino gambling in the US accounted for approximately 25% of the global market; GAN currently estimates iGaming in the US accounts for only 10% of the global market. With digital transformation in the US gambling industry, this spread should shrink considerably.

Well-Positioned to Expand within the US

The company is well-primed for growth as iGaming and sports betting is legalized across the United States. To my mind, it has already proven its ability to navigate complex legal landscapes. While GAN is licensed to operate its GameSTACK platform for iGaming in only 3 states (New Jersey, Pennsylvania, and Indiana), as well as Italy and the UK, regulations vary greatly across borders. Some investors may see the fact that GAN is only licensed to operate in 3 states as an indication of high barriers to entry. Instead, I see it as an indication that the company has massive growth opportunities. GAN has already proven it can dominate markets. Management estimates approximately half of all 2019 online sports wagers in New Jersey and Pennsylvania utilized the GameSTACK platform.

FanDuel’s Usage of GameSTACK Can Help Propel the Platform

While high FanDuel concentration definitely creates a risk, I see multiple benefits to it as well. First, GAN collects in-depth player data for each individual user on its platform, FanDuel users included. With FanDuel being such a major player in the iGaming and sports betting world, this provides GAN with helpful data that allows it to better serve its existing and future customers. FanDuel also provides GAN a stage to showcase the effectiveness of its GameSTACK platform, especially in the US market. This is a big advantage as the company looks to expand its presence in the US. Finally, FanDuel and parent company Flutter Entertainment (OTCPK:PDYPY) are in a much better spot than other smaller, land-based operators to weather the current crisis. This provides GAN with somewhat of a safety net if other customers default on payments, and reduces overall risk created by COVID-19. For reference: in 2019, FanDuel accounted 46.3% of GAN’s total revenues.

Risks

There are many risks an investor will have to consider with GAN, with the most significant being the effect of COVID-19 on its customer base and its reliance on a small number of customers.

Obviously, COVID-19 presents a major risk if the current lockdown is longer than expected and customers begin to default on payments. GAN believes that the majority of its current brick-and-mortar-based customers have ample liquidity to last 2-3 quarters, with some able survive over a year in the current state of lockdown. Also, GAN’s largest brick-and-mortar-based customer, WinStar Casino, has already announced a limited reopening for its Oklahoma casino, and there appears to be enough interest in the state to keep it afloat. As for COVID-19’s impact on sports betting, even though GameSTACK supports online sports betting, I’m not too concerned on that front. Even if sports are suspended longer than expected, only about 10% of GAN’s revenues come from sports betting. I also believe the growth in iGaming will help mitigate this risk.

The other major risk is the lack of customer diversity. As I mentioned previously, 46.3% of GAN’s 2019 revenues came from FanDuel. I believe there is a definite chance that FanDuel attempts to develop and migrate to its own platform in the future. However, it would take a significant amount of time to develop. By the time a complete transition would happen, GAN would likely have diversified its customer base enough to reduce the impact on its bottom line.

Conclusion

I believe GAN is the definition of a high-risk, high-reward stock. While I don’t necessarily believe the company will grow to the extent it did in 2019, it still has fantastic potential as it looks to expand to new states and support struggling casino operators where it’s licensed to operate in. In order to buy this stock, you absolutely need to believe that the current lockdown and impending recession will end quick enough for land-based casino operators to survive. With the world changing rapidly week by week, I’m not going to attempt to persuade anybody on that front. As of right now, I believe that GAN is a buy, and if news begins to improve materially for land-based casino operators, then I believe it’s a strong buy. All in all, GAN is a very interesting iGaming pure play that deserves a look by anyone interested in the space.

Disclosure: I am/we are long GAN, PDYPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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