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Rivalry Corp has a 246 per cent upside, says Eight Capital

With a casino segment that’s just getting started and a focus for its sportsbook and gaming offerings on the lucrative Millennial and GenZ demographics, Canadian betting tech company Rivalry Corp (Rivalry Corp Quotes, Charts, News, Analysts, Financials TSXV:RVLY) is one wager investors will want to make this year. That’s the line from Eight Capital analyst Adhir Kadve, who put out a new report on the company on Thursday where he reiterated a “Buy” rating on the stock and $3.25 target price.

Toronto-based Rivalry has an online betting platform aimed at attracting e-sports and sports bettors as well as casino bettors. The company has operations in over 20 countries, an Isle of Man license, a bookmaker license in Australia and an internet gaming registration in Ontario. Of its offerings, Rivalry has onsite engagement experience Quest and casino games Rushlane and Aviator.

Rivalry pre-announced its third quarter betting handle and revenue numbers on Wednesday, registering a record handle of $70.3 million, up 203 per cent year-over-year and up 83 per cent sequentially, and record revenue of $7.1 million, up 93 per cent year-over-year and up 35 per cent compared to the previous quarter. The company said its user base grew 277 per cent year-over-year compared to growth of 203 per cent for the previous quarter. Ten per cent of Rivalry’s third quarter revenue came from its Casino segment, with management saying that users are coming to the Rivalry platform specifically for casino, as opposed to being cross-sold from betting.

Rivalry CEO and Co-Founder Steven Salz said the results are a testament to the company’s player acquisition and brand strategy.

“We are very well positioned for a strong finish to 2022 and continued momentum into next year. We expect to benefit from a number of near-term catalysts, including several major esports events, a growing presence in traditional sports betting, the launch of a mobile app, and the ongoing introduction of new casino games, media content, and influencer partnerships,” Salz said in a press release.

Commenting on the preliminary Q3 results, Kadve said the $70.3 million handle was above his forecast at $64.9 million, while the $7.1 million topline was in line with his estimate. On the Casino revenue, Kadve said the results are encouraging, especially considering the limited marketing spend to date from the company, and that with a dedicated internal game team developing IP, Rivalry will be aiming to bring more games to the market.

“We continue to believe that casino can be a major product offering from Rivalry with several benefits including driving growth, diversifying revenue streams, reducing seasonality, and stabilizing margins (less volatility versus OSB),” Kadve wrote.

Rivalry held an inaugural virtual Investor Day on Wednesday, as well, with presentations and roundtable discussions from executives and a number of Product Leads. Kadve attended and said he came away with a better appreciation for Rivalry’s “intense focus” on creating a truly differentiated sportsbook, with a clear brand and user experience geared toward the GenZ and Millennial crowd.

“We continue to believe that Rivalry is a leading eSports betting platform and see several avenues supporting growth including ramping up in recently entered regulated markets (aided by an upcoming mobile app), new grey market entry and broadening its platform with its casino and traditional sports offering,” he said.

With a $55 million market cap, Rivalry’s stock has been on the decline since its debut on the TSX Venture last fall. Shares are down by about two-thirds over the past 12 months and currently down 44 per cent year-to-date. 

But Kadve sees upside from here, with his reiterated 12-month target of $3.25 per share representing at press time a projected return of 246 per cent.

On Rivalry’s demographic focus, Kadve said more than 80 per cent of its user base are Gen Z and Millennials who are less than 30 years old.

“These users are early in their consumer lifecycles and thus building an early connection with them should foster strong organic growth as these users mature and continue to increase their spend levels on the platform,” Kadve wrote.

On his outlook for Rivalry, Kadve is expecting full 2022 revenue of $25.9 million compared to $11.1 million for 2021 and moving to $48.3 million for 2023. On adjusted EBITDA, the analyst is calling for negative $24.0 million in 2022 compared to negative $14.0 million in 2021 and moving to negative $9.1 million in 2023. 

On valuation, Kadve has Rivalry’s EV/Sales going from 3.0x for 2021 numbers to 1.3x for 2022 and to 0.7x for 2023. The analyst said RVLY is currently trading at less than 1.0x 2023 Sales compared to its peer group of B2C online gaming operators trading at 1.0x, while Kadve’s $3.25 target is based on 3.5x 2023 Sales. 

“Our premium valuation is justified by Rivalry’s significant global opportunity, which translates to higher expected growth rates than larger and more established sportsbooks,” Kadve wrote.

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