A once in a lifetime opportunity? Always back the house | Stock Spotlight: PointsBet (PBH.ASX)

This week we take a look at a recent initial public offering (IPO) that caught our attention and what we believe is potentially a “once in a lifetime” opportunity to participate in a unique $100+ billion market opportunity.

PointsBet (PBH.ASX) is a newly listed company that operates an online sports betting business in Australia and, as recently as January this year, has entered the enormous and emerging opportunity that is the US sports betting market. Management is highly experienced in the industry and their technology platform is wholly owned.

There are many companies that look to raise money from investors every year and we have met hundreds of them in our time. Each one of them has a story to tell and along with every story there’s always a huge market opportunity up for grabs.

Unfortunately, in most cases, the reason these hopefuls fail is because to win that potential market share they either need to displace large and incumbent operators or they fail to properly educate their customers about their new offerings and why their product or service is the way of the future. In our mind, and in the case of PBH, this potential market opportunity does not require any of the above.

What is unique about the new and emerging US sports betting opportunity is that it is not really new! There is currently an estimated $100 billion or more in illegal sports betting that is currently undertaken by Americans every year with offshore book makers. For some mind boggling and somewhat illogical reason, sports betting and especially online sports betting was illegal across all US states apart from Nevada (Viva Las Vegas!).

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Source: Company filings

That Professional and Amateur Sports Protection Act of 1992, referred to as PASPA or the Bradley Act, was judicially-overturned by the US high court in May last year. This now allows each individual state in the US to draft their own sports betting legislation and, as a result, set their own tax rates, number of licenses available and other rules. So far fourteen states have passed legislation. New Jersey (NJ) is leading the way since last year and is already on track to turn over $5 billion in bets on an annualised basis. That’s just in the first year alone….

Source: American Gaming Association

We believe that the pressure to legalise sports betting across the country will intensify. The majority of US states are currently missing out on billions of dollars of tax revenue due to the enormous amount of bets being taken each year by offshore book makers. As states that legalise begin to see the fruits of their newfound tax revenue we believe it is reasonable to assume that the majority of neighbouring states will not want to miss out and then look to pass their own legislation. In Australia, a mature sports betting market, tax rates on book makers are around 45%. So far most US states have legislated tax rates in the comparatively low 6-14% rate range. This indicates that they are keen to incentivise book makers to launch and take market share aggressively.

To this point PBH is showing promising signs. In NJ, PBH launched in January this year and so far has taken over 4% market share and is the third largest online book maker in the state. Since each state has a limited number of licenses available, first mover advantage is critical to success. PBH has so far secured licenses in New Jersey, Iowa, Colorado, New York (pending legislation) and soon Illinois.

Source: Company filings

Based on management’s presentation, there is over $2 billion of revenue up for grabs over the next few years. That is just from the states that have legalised so far. PBH has raised $75 million from investors, which we believe will accelerate their marketing initiatives and enable further license partnerships going forward. In the meantime, PBH is on track to break even in their Australian division and, as a group, should generate around $40 million in revenues in CY2019. Investors should not expect profits anytime soon as, we would hope, the company will continue to reinvest in the business and capture as much market share as they can while this unique and once in a lifetime opportunity in the US is occurring.

Even if PBH does not manage to capture a meaningful share of the US sports betting market over the medium to long term, we are confident that their licenses in each state will be an attractive and strategic asset for other sports betting companies to acquire. Tabcorp (TAH.ASX), for example, has not yet made public any real plans to enter the US market but it is possible that they are watching patiently from the sidelines and are ready to pounce on someone like PBH at some point in the future.


Disclaimer: We own PBH in the TAMIM Australian All Cap IMA Portfolios.