It’s not a bad time to buy Score Media, says Mackie Research

The company’s revenue fell below his expectations, but Mackie Research Capital analyst Nikhil Thadani is still bullish on The Score Media and Gaming (The Score Media and Gaming Stock Quote, Chart, News TSXV:SCR).

On Wednesday, Score Media reported its Q1, 2020 results. The company lost $4.09-million on revenue of $9.2-million, a topline that was down slightly from the $9.5-million the company generated in the same period last year.

“It was a huge achievement by our product development team to create and launch a best-in-class, natively built mobile sports book at the very beginning of fiscal 2020,” CEO John Levy said. “Our unique integrated approach to media and sports betting sets us apart from any other operator, and enabled us to hit the ground running in our launch state of New Jersey. But New Jersey is only the start for us. As we grow our footprint there, we are also moving to quickly expand our presence across the United States. Under our existing multistate market access framework agreement with Penn National, we anticipate launching theScore Bet in Indiana later this year, pending receipt of all relevant licences and approvals, with more states to follow. At the same time, we continue to actively explore other market access opportunities. Further, our hypothesis that sports app users would engage with our gaming product was reinforced in our first quarter of operation. Approximately three quarters of fans who placed a wager on theScore Bet in Q1 came directly from theScore sports app, supporting our powerful integration of media and gaming. Sports app users are also proving more valuable in terms of handle, gross gaming revenue and retention than non-sports app users. This is especially exciting given the record user engagement we saw on our sports app in Q1, as well as the robust product road map we have in place to further strengthen the connection between our media and gaming platforms, including new product features and cross-promotional capabilities.”

Thadani broke down what he felt was the reason for the revenue shortfall (he had expected a topline of $10.8-million).

“Our revenue estimate was too aggressive,” the analyst said. “While the company has begun to generate initial sports betting revenue in New Jersey, investors likely expected better win rates (i.e. in-line with industry averages) — we are not too concerned; we expect win rates to improve over time. The company also likely incurred meaningful New Jersey sports betting launch and initial marketing expenses. In addition, some ad inventory was utilized to promote the new betting product, which combined with a change at one programmatic customer led to a y/y revenue decline, in what is usually the company’s seasonally strongest quarter. Excluding these programmatic items, we believe the company would have posted y/y organic revenue growth.”

In a research update to clients today, Thadani maintained his “Buy” rating and one-year price target of $1.00 on Score Media, a figure that implied a return of 33 per cent at the time of publication.

The analyst thinks SCR will post EBITDA of negative $18.2-million on a topline of $32.4-million in fiscal 2020. He expects those numbers will improve to an EBITDA loss of $16.1-million on revenue of $35.6-million the following year.

Thadani says now is not a bad time to buy Score Media, assuming the company can realize its sports betting goals.

“Our $1.00/sh target, equates to ~$80/user, which compares favourably to ~$400-500/user customer acquisition costs,” he noted. “Private US daily fantasy (effectively a sports betting workaround to monetize US sports fan engagement) were valued at ~US$1000/user in C2015. At the same time, SCR is up ~300% (even after today’s pull-back) since the US Supreme Court paved the way for legalized US sports betting in May 2018. We expect SCR sports betting to be much more widely available and a meaningful revenue driver in the near to medium term.”