Jun 26, 2020 Kambi Remains an Excellent Bet Dear Savio, DraftKings Inc. (DKNG), a leading online sports betting company, is in the right place at the right time… and investors seem to have noticed. The stock has tripled from its March lows and built up a massive $12 billion market value. Kambi Group Plc (KAMBI.ST), a leading provider of sports betting software platforms, is also in the right place at the right time. In fact, Kambi and DraftKings are often in the exact same place at the same time, as DraftKings accounts for about half of Kambi’s U.S. revenues and about 10% of total revenues. But Kambi remains a relative unknown to U.S. investors. Perhaps that’s because the company operates from Malta and its primary stock exchange listing is in Stockholm. That’s a quirky combo. And yet, the company is rapidly becoming a major player in U.S. sports betting and online gambling. For those subscribers who may not be familiar with Kambi, which I recommended last October, let’s quickly review… Kambi operates behind the scenes as a business-to-business service provider to casino operators and other gambling platforms, like DraftKings. The company’s sports book platform offers a front-end user interface that integrates with critical functions like odds computing, customer intelligence, and risk management. At last count, Kambi was serving 20 casino/gambling operators across six continents. 
Here in the United States, Kambi has secured long-term service contracts with several leading operators, including Penn National Gaming Inc. (PENN) and JACK Entertainment… and business is booming, or at least it was until the COVID-19 pandemic struck. As the company reported on April 24: The quarter began very well for us, both in terms of the numbers and how we continue to increase our footprint in the United States. In January, we launched in West Virginia with Penn National. In February, we launched five retail sports books in Mississippi, also with Penn. And in March, just before coronavirus took effect, we took the first legal sports bet in the State of Illinois and Michigan with Rush Street and Penn National, respectively. We also launched with Penn in Illinois… We have many more launches in the pipeline and are looking forward to completing these as soon as it’s safe to do so. Our record of delivery in the US is unmatched… There can be no doubt Kambi has been setting the pace in the US. We are active in more states than any other end-to-end sports betting supplier… We are now active in 10 states with Colorado to follow shortly. Within these states, we are online everywhere it is currently possible to be and operate more than 30 on-properties sportsbooks… And among these 10 states, we have created eight market firsts through a mixture of first legal bets and first legal online bets… This speaks to our operational excellence and reliability to deliver for multiple partners simultaneously. It also reaffirms our strength in regulatory compliance and corporate probity, which enable us to get licenses quickly. Not only is Kambi the trusted partner for operators, but we are highly trusted by regulators too.
Before the coronavirus pandemic struck, Kambi was achieving breakneck growth. Until March 12, the company’s turnover for the quarter had soared 47% compared to the same period one year earlier. But then COVID-19 shut down everything, including almost every live sporting event. The shutdown became so severe that professional badminton and table tennis become two of the company’s top gaming revenue generators at the end of the quarter. True story. Despite this setback, Kambi still managed to deliver a 27% jump in operator turnover for the quarter. (The operator turnover is the total stakes placed with Kambi’s operators by their end users – i.e., gamblers.) And the company also managed to produce a similar jump in operating income, while boosting its net cash position to more than $40 million. Kambi probably didn’t achieve equally impressive results during the coronavirus-ravaged second quarter. We’ll find out on July 23 when the company reports those results. The Americas account for 37% of Kambi’s total revenues. But that percentage is on track to ramp up swiftly as U.S. states, one by one, continue to legalize sports betting within their borders. In fact, because of the COVID-19 crisis, the U.S. sports betting boom could kick into hypergrowth mode. That’s because U.S. states are desperate for cash. Because they spent heavily to try to offset the effects of the coronavirus, they are now facing deep budgetary holes they need to fill. Replenishing state coffers will not be easy, especially when unemployment is hitting Depression-era levels and millions of small businesses are struggling. In this context, legalized gambling has become low-hanging fruit for revenue-hungry states. And the political opposition to legalized gambling will probably weaken and yield to expedience. Bottom line: The COVID-19 crisis has kicked off a mini-boom in sports betting legalizations. The virus “will accelerate the expansion of sports betting and online casinos in the next 12 to 24 months,” said Chris Krafcik, a managing director with Eilers & Krejcik Gaming, which tracks internet gambling legislation in the United States. “Both activities provide states, whose economies have been massively disrupted by the outbreak, the opportunity to capture new revenue immediately in the form of upfront license fees, and over time through taxes.” So far, 18 U.S. states plus the District of Columbia offer sports betting, and four offer internet gambling, which can include online casino games, slots, and poker. In addition, Virginia and Tennessee have approved sports betting but have yet to launch. Louisiana, Massachusetts, and Ohio will probably legalize sports betting by the end of this year. That would bring the national total to 23 states. “States are facing unprecedented financial challenges,” said Matt King, CEO of FanDuel Group. “We are firm believers that mobile sports betting and online gaming legislation will be the type of commonsense legislation that states will look to when legislatures return.” The wave of gambling legalizations bodes well for Kambi. As the COVID-19 pandemic fades from the headlines and sports betting legislation momentum continues to build, I expect Kambi’s revenues to double over the next two years – from roughly $100 million to $200 million. And I expect earnings per share to approach $1. At that level of profitability, the stock would be trading for 21 times 2022 earnings. That valuation may be a bit pricey, based on traditional valuation metrics. On the other hand, fast-growing companies often command rich valuations. Amazon.com Inc. (AMZN) and Netflix Inc. (NFLX) are trading for 131 times and 91 times earnings, respectively. For additional perspective, DraftKings’ market cap is 18 times greater than Kambi’s, even though DraftKings’ annual revenues are just five times greater. Furthermore, DraftKings is booking quarterly losses, while Kambi is reporting profits and positive cash flow. If Kambi’s stock traded on a major U.S. exchange, instead of the relatively obscure Stockholm exchange, its valuation would probably be much higher already. But that’s okay. If the company continues to execute its strategy as well as it has been, the stock won’t remain a secret forever. Kambi is already up 37.7% in our portfolio… but I expect this stock to soar over the next couple of years. That said, in this volatile stock market environment, I will not be raising my “buy up to price” on the stock. Regards, 
Eric Fry
The Speculator
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