Rivalry is a good bet, says Eight Capital

The second half of the year should be catalyst-rich for Canadian online betting company Rivalry Corp (Rivalry Stock Quote, Charts, News, Analysts, Financials TSXV:RVLY), according to Eight Capital analyst Adhir Kadve. In a Friday report, Kadve reviewed Rivalry’s latest quarterly numbers, maintaining a “Buy” rating on the stock and $3.25 target price. 

Sports betting and media company Rivalry has platforms in esports, traditional sports and casino betting and has an Isle of Man license for online gambling, a sports bookmaker license in Australia and an internet gaming registration in Ontario. The company reported its second quarter 2022 financials on Thursday.

A typically slow quarter with some pro sports on hiatus, Rivalry managed to grow its revenue by 60 per cent year-over-year and by 11 per cent sequentially to $5.3 million, with all of the gains coming organically. The record topline was paired with record gross profit at $2.1 million, up 206 per cent year-over-year and up 201 per cent sequentially. Rivalry launched gaming operations in Ontario in April and then in Australia in May, although management said the impact of those two openings won’t be felt until subsequent quarters.

Rivalry Co-Founder and CEO Steven Salz said the company’s third quarter is already looking sharp, with a record monthly handle for July of $23.4 million. 

“The strength in the business in the second quarter was all achieved organically and driven by our existing core markets. Launching in our first two regulated markets was a very important milestone in Q2 that will help drive growth in the coming quarters as we establish our brand with consumers, deploying our ‘crawl, walk, run’ strategy that prioritizes operating with sustainable unit economics in new markets first, and scaling spend thereafter,” Salz said in a press release.

“We were very encouraged with our Q2 performance considering that we did not see a material contribution from either of these markets yet, and during what is already a seasonally quiet quarter. On the other side we were proud to demonstrate the profitability potential of our current betting handle, posting record gross profit during the quarter,” he said.

Rivalry’s Q2 revenue of $5.3 million was a beat of Kadve’s estimate at $4.1 million, while gross profit of $2.1 million at a 39 per cent margin was also better than Kadve’s call at $1.0 million at a 25 per cent margin. The Q2 handle generation of $38.4 million was up 98 per cent year-over-year but down four per cent sequentially and came in under Kadve’s forecast at $45.2 million.

“Rivalry reported a top line beat while handle came in lower than our expectations with the sequentially lower Handle growth explained by seasonality in the eSports calendar,” said Kadve.

“That said, Rivalry is seeing early momentum in Q3 and we see several near-term catalysts, including the ongoing ramp in Ontario and Australia, upcoming marquee eSports events, the start of the traditional sports calendar, and a pipeline of product releases, which could drive upside to our estimates. Further, the company announced its inaugural Investor Day to be held in October, which could also serve as a key catalyst and business update,” he wrote.

Kadve said Rivalry’s product roadmap looks good, with its mobile application and a new casino offering currently in soft launch. Management has put late October as a release date for the mobile app, which is a bit of a delay, Kadve noted, as it had originally called for a release in the third quarter, with the delay coming from a longer than expected iOS App Store review process, according to the company.

“Rivalry is looking to bolster its casino offering with both in-house developed games (like Rushlane) as well as third-party games. We continue to like this strategy as a casino offering enhances the TAM while offering strong cross-sell opportunities thus driving potential for significant growth in GGR,” Kadve said.

Kadve has updated his financial forecast on Rivalry and is now calling for 2022 revenue and adjusted EBITDA of $25.9 million and negative $24.0 million, respectively, and for 2023 revenue and adjusted EBITDA of $48.3 million and negative $9.1 million, respectively.

The analyst said that RVLY is currently trading at about 1.0x 2023’s EV/Sales compared to 1.3x for its peer group of B2C Online Gaming Operators, while his $3.25 per share target is based on about 3.5x 2023’s EV/Sales.

“Our premium valuation is justified by Rivalry’s significant global opportunity which translates to higher expected growth rates vs. larger and more established sportsbooks. Key risks to our target and rating include deteriorating macroeconomic conditions leading to a pullback in consumer discretionary spending, intensifying competition and regulatory changes,” he wrote.

Rivalry, which began trading on the TSX Venture Exchange in October 2021, has seen its share price sink from $3.80 on October 5 to as low as $0.75 last month. The stock rose in trading on Friday by almost seven per cent, bringing it to $1.10 per share. At the time of publication, Kadve’s $3.25 target represented a projected one-year return of 216 per cent.