Sportradar (SRAD) had a solid debut but without fireworks – the shares priced in the range at $27 and ended up down some from there to trade at $25.50.
We started investing in the SportsTech theme a few months ago when we added Genius Sports (GENI) to the portfolio over at SPACvest.
Sports entertainment is a giant industry and it’s undergoing a technology transformation as most industries are. At the same time power is shifting as franchise owners, players, and media companies vying for their own piece of the growing pie.
The first thing to like about Sportradar is its longevity in the space. They have been at it for 20 years and have steadily built a strong position which has translated into increasing momentum. Things shifted into a higher gear about six years ago with partnerships with the NFL, NBA, and NHL. They welcomed some new US investors like Ted Leonsis, Mark Cuban, and Michael Jordon.
During a February 2021 group video with the management team and Ted Leonsis, I came away very informed and impressed about the long-term future of sports entertainment and the themes developing there. Because they are based in Switzerland and started in Europe they are not as known in the US. They have a different culture and management approach that aligns well with how sports franchises think about growing their share of the consumer market.
Their business is selling products and services to enable sports betting, advertising, value-added content, and data analytics. This picture from the Sportradar roadshow deck is a good visual for where they sit and what they do.
Their management team, board of directors, and investors are a superpower. The operating team may have an eclectic background but it suits the culture of the company and they all have solid experience and strong networks. Investors include Michael Jordan and Mark Cuban but more important Ted Leonsis who also acts as a kind of “sportstech evangelist” that helps shape industry thinking and opens doors for the company.
Sportradar has a huge pile of data that is a necessary pre-condition for building the suite of products and services that they have launched over the years.
They have invested heavily in technology infrastructure to meet the extreme demands of the sporting industry which include very low latency and high scalability along with the more typical needs like availability and security. It’s not easy to build and requires a team of 740+ software engineers. That’s a moat.
Finally, their operating at the intersection of sports leagues, media companies, and betting operators have given them unique visibility to develop and commercialize new products and services for these markets like digital overlays for media and match-fixing detection. The ultimate end-game for sports entertainment will be a mix of all three elements. We already know that all the players are feeling the pressure of this convergence and Sportradar is already there.
The fight for the US market could be different. Sportradar dominates the European market and they have invested heavily to do the same in the US. So far US revenues represent just 11% of the total (for 1H2021). While they are growing fast some investors are concerned that the US market could evolve differently and make it harder for Sportradar to replicate their game plan there.
A strategy that includes a substantial element of M&A can be risky. Sportradar presents it as a strength given its history of 13 acquisitions over the last 10 years. These have historically been on the smaller side and directly related to expanding an existing product or service. Some might describe them as “tuck in” style deals. They were not out there buying growth. But it can result in some ugly “seams” between products and services that can become visible over time.
Gaming could be a challenge or a distraction if it’s not done right. The investments they have made in virtual gaming and simulated reality are very promising if they stick to developing them within the sphere of sports entertainment. (Image the power of this in fantasy leagues.) It’s not clear where the line is between general gaming and sports-related but both can involve betting. If they go too far into casino-style games it might be too far from their core capabilities.
Valuation & Stock Conclusion
We’re in an IPO market where 20x sales multiples have become the “new normal” for good deals. That doesn’t make me happy as an investor. But that’s the market we are in now.
At the current price, the market cap of SRAD is about $8.5B. Revenues for 2021 should come in around $650-675M which is up 38% YoY. That puts the shares at 12.7x CY sales.
The company does generate positive cash flow and has a long-term model where they see 25-30% EBITDA margins. Their past results support this level of profitability.
Most of their relationships and contracts are long-term and a large portion (78%) are subscription-based which argues for a higher multiple.
The shares are fully valued on 2021 figures for sure but if we look out at 2022 and apply 30% growth and normalize operating earnings at 25% we get to $220M and a 38x multiple on adjusted operating earnings. Still not cheap but at least that’s related to a positive bottom line.
Despite some valuation risk here we are putting Sportradar in the Model Portfolio and I’ve added some to my personal long-term portfolio. The strongest arguments are management, investments in data and infrastructure, and a long history of successful relationships across the sports entertainment industry. If we get some better prices for whatever reason (lockup expiration, higher interest rates) it will be an opportunity.
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