Rivalry has a 95 per cent upside, says Eight Capital

Eight Capital analyst Adhir Kadve continues to rate Rivalry Corp (Rivalry Corp Stock Quote, Chart, News, Analysts, Financials TSXV:RVLY) highly as he maintained a “Buy” rating but lowered his target price from $4/share to $3.25/share for a projected return of 95 per cent in an update to clients on Thursday.

The Toronto-based organization has built an online betting platform which it leverages in tandem with a differentiated media strategy to attract the next generation of esports and sports bettors.

Kadve’s updated analysis comes after Rivalry Corp released its financial results for the fourth quarter of its 2021 fiscal year along with year-end figures.

“Rivalry reported a strong set of results topping both our Revenue and Handle estimates in the seasonally slower Q4, Rivalry saw strength in its traditional sports betting offering which helped offset the seasonality in its eSports offering,” said Kadve, who indicated the reduced target price was attributable to sell-offs in online gaming and growth equities, while also rolling valuation ahead one year.

The company’s financial quarter was headlined by $2.2 million in revenue, nearly doubling the Eight Capital estimate of $1.2 million despite being down 42 per cent sequentially on account of seasonality, and it was a 615 per cent improvement over the same quarter in the 2020 fiscal year.

Another big item for Rivalry Corp was its handle for the quarter, which came in at $24.9 million to outpace the EIght Capital expectation of $17 million, while the figure also represented a sequential increase of seven per cent and a 389 per cent year-over-year improvement.

Rivalry Corp’s gross profit came in at $0.4 million, which was roughly in line with the Eight Capital estimate of $0.5 million, but with the revenue beat, the gross margin was a miss at 19 per cent compared to the Eight Capital forecast of a 45 per cent margin.

Meanwhile, Kadve calculated an adjusted EBITDA loss of $5.1 million in the quarter for the company, a slight miss in comparison to the $4.3 million loss expectation set out by Eight Capital.

“The growth we saw in Q4 was highly encouraging, and a signal of strength in what is typically the most seasonally quiet quarter of the year, with us delivering modest sequential growth over Q3,” said Steven Salz, Co-Founder and CEO of Rivalry in the company’s April 27 press release. “As our traditional sports betting product has continued to improve, we are seeing a more diverse product mix, which is helping to blunt the seasonality of esports, something that we expect to continue in the future.”

Rivalry is in the process of working itself into the newly-opened markets in Ontario and Australia, with Kadve noting management’s preference to learn customer habits and behaviours as opposed to trying to woo new customers with large bonus incentives, only looking to increase their marketing spend once they believe they can efficiently deploy marketing dollars with a high ROI.

The company is also working in the background to launch an app, tentatively set to debut in the third quarter of 2022, as well as trying to boost its online casino platform by adding more games to its platform.

“We think this could be a major product catalyst for the company and key to an enhanced user experience and one the company will be able to leverage in Ontario, Australia and subsequent regulated market launches,” Kadve said of the Rivalry app. 

Rivalry wrapped up its 2021 fiscal year with $11.1 million in revenue for a 617 per cent year-over-year increase, and Kadve sees the momentum continuing into 2022, as he raised his estimate from $27.3 million to $28 million for a potential year-over-year increase of 152 per cent. Looking ahead to 2023, Kadve forecasts revenue to be at $48.2 million for a potential year-over-year increase of 72.1 per cent.

Consequently, Kadve also forecasts the company’s EV/Sales multiple to drop from the reported 6.4x in 2021 to a projected 2.5x in 2022, then dipping again to a projected 1.5x in 2023.

Meanwhile, after reporting a $14 million adjusted EBITDA loss in 2021, Kadve expects the losses to continue with a newly-minted $21.4 million loss projection (previously a $16.1 million loss) in play for 2022. Looking ahead to 2023, Kadve introduced an adjusted EBITDA loss projection of $8.6 million.

Overall, Kadve believes the company experienced a positive quarter, with more good news potentially on the horizon.

“All in all, we believe the results were positive and we see a strong setup for the company as it looks to expand its betting product globally, namely ramping up in Ontario and imminently launching its offering in Australia and an ongoing rollout in grey markets,” Kadve said.

Rivalry Corp’s stock price has been in the red to start 2022 at a 3.7 per cent loss, having dropped as low as $1.28/share on January 10, then climbing as high as $2.44/share on February 9 before levelling back off since then.