Rivalry Corp is a Buy, says Eight Capital

Shares of Rivalry Corp (Rivalry Corp Stock Quote, Chart, News, Analysts, Financials TSXV:RVLY) are down plenty since the stock began trading on the TSX Venture last October, but Eight Capital analyst Adhir Kadve is optimistic for the company’s second half performance this year, maintaining a “Buy” rating and $3.25/share target price for a one-year projected return of 117 per cent in an update to clients on Friday.

Toronto-based Rivalry 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 analysis comes after Rivalry reported its first quarter financial results for the 2022 fiscal year.

“While there was not much incremental information in management’s commentary on the call given the recent FQ4 results, we see a strong outlook for the company in H2 and beyond as both the Ontario and Australia markets went live during Q2 and the company is seeing ongoing momentum in its existing grey markets operations,” Kadve said.

Rivalry’s revenue for the quarter was $4.8 million report, which represented a 50 per cent beat in relation to the $3.2 million projection set out by Eight Capital while also marking 121 per cent sequential growth and a 149 per cent year-over-year increase.

On earnings, Rivalry reported an adjusted EBITDA loss of $5.3 million to come in slightly ahead of the $5.9 million loss projection from Eight Capital while being roughly in line with the $5.1 million loss from the previous quarter. Meanwhile, the company reported gross profit of $0.7 million for a 14 per cent margin, in line with the $0.6 million estimate from Eight Capital while being up 71 per cent sequentially and 26 per cent year-over-year.

“Gross Margin remains volatile as Rivalry’s sportsbook continues to skew largely towards esports (90 per cent of Handle) versus traditional sports (ten per cent of Handle), and esports bettors tend to be less sophisticated vs. traditional sports bettors hence the volatility,” Kadve said. “That said, we expect that as Rivalry continues to scale and build up its traditional sports offering and sees even more diversity within its esports titles, margins likely will stabilize.”

Overall, the company enjoyed a strong handle of $40.2 million to produce 61 per cent sequential growth and a 273 per cent year-over-year increase, with that number only expected to get higher with promising early returns from the release of its sportsbook in Australia on May 9.

Rivalry ended the quarter with $30.1 million in cash and equivalents after being at $35.5 million to end the previous quarter, with Kadve pointing to marketing spend and increasing headcount, specifically in engineering functions, as catalysts.

“We are pleased to report the highest betting handle and quarterly revenue in company history. These results are a testament to the consistency Rivalry has delivered for over two years now, demonstrating triple-digit year-over-year growth in every quarter,” said Steven Salz, Co-Founder and CEO of Rivalry in the company’s May 26 press release. “We note that first quarter figures represent organic growth in our existing markets and do not include any results from our two new regulated markets, Ontario and Australia, both of which launched in the second quarter.”

Despite the first quarter revenue beat, Kadve has left his overall 2022 revenue estimate for Rivalry at $28 million for a potential year-over-year increase of 152.3 per cent, with lower estimates in the second ($4.1 million vs. $4.5 million) and fourth ($9.3 million vs. $10.6 million) quarters accounting for the difference.

“We are expecting some seasonality to factor into our Q2 estimates, as the esports calendar tends to be lighter vs. Q1 thus affecting overall Handle growth,” Kadve said. “However, management noted that a strong cross-sell between esports and traditional sports should help mitigate some of that seasonality as the esports and traditional sports calendars do offset.”

Looking ahead to 2023, Kadve maintained a revenue forecast of $48.2 million, good for a potential year-over-year increase of 72.1 per cent.

From a valuation perspective, Kadve forecasts the company’s EV/Sales multiple to drop from the reported 5.6x in 2021 to a projected 2.2x in 2022, then to a projected 1.3x in 2023.

Changes were also minimal in relation to gross profit, as Kadve lowered his 2022 projection from $5.6 million to $5.5 million for an implied margin of 19.6 per cent, with a slight reduction from $12.1 million to $12 million in play for 2023, implying a wider margin of 24.9 per cent.

Meanwhile, Kadve forecasts an additional adjusted EBITDA loss for 2022, revising his forecast from a $21.4 million loss to a $23.4 million loss, while his 2023 forecast improved from a loss of $8.6 million to a projected loss of $6.2 million.

Rivalry Corp’s stock price has dropped by 5.6 per cent since the start of 2022, hitting an early peak of $2.44/share on February 9 and trading at a 2022 low of $1.27/share on Tuesday.