What a year Genius Sports (NYSE:GENI) has had from a low of $3.39 at the start of the year to highs of $7.96 and a subsequent crash all the way back down to $5 per share.
It’s been nothing short of a rollercoaster ride for investors who are up 48% for the year but down almost 40% since mid-June.
Shareholders, rightly, may be wondering what is causing such enormous share price volatility and is it worth hanging on to this bucking bull?
5 Little-Known Facts About Genius Sports
Genius Sports first came to the public’s attention as a pioneer of sports data by shaping the way sports information is collected, processed, and delivered.
Few investors recognize the technological prowess underpinning Genius Sports. By owning its own technology stack, Genius Sports can not only collect data but use analytics and artificial intelligence to extract insights to help its partners make smarter decisions.
The company has gained a reputation for its trailblazing technology that enabled management to lock in deals with major sports leagues to allow them capture and disseminate real-time data.
While the company gained notoriety for partnerships in mainstream sports, such as soccer and basketball, it expanded to data in emerging sports markets, such as esports, too. For example, the exponential growth of esports has been a revenue growth lever for GENI.
Beyond its proprietary tech stack, expansion beyond traditional sports, and innovation in sports data collection, Genius Sports has also expanded to create a global footprint. Remarkably, the company already operates in over 100 countries and offers sports data solutions to a diverse client range.
By creating a diversified revenue stream, Genius Sports mitigates customer concentration risk and positions it as a dominant player in the sports data market.
Lastly, the company’s management has been highly successful in securing exclusive partnerships with major sports leagues, such as the NBA, NFL and Premier League. These partnerships grant GENI exclusive rights to collect and distribute data, creating significant barriers to entry for competitors like SportRadar (NASDAQ:SRAD).
All those facts combine to make for a successful business model but is now the time to buy?
Is Genius Sports Stock Undervalued?
Genius Sports is undervalued according to the eleven analysts covering the stock who assess fair value at $9.59 per share, representing 78.9% upside. The range of analysts’ estimates is from a low of $7 per share to a high of $15 per share.
A discounted cash flow forecast analysis pegs intrinsic value at $5.03 per share, implying 30.9% upside.
Even the company’s price to last twelve month sales metric is 2.9x is not overly elevated for a high growth firm. With that said, the peer average is 2.3x.
We do need to highlight at this time that it’s not possible to perform a price-to-earnings multiple analysis because earnings are still negative.
Billion Dollar High Growth Firm
Genius Sports is somewhat of an enigma at first glance because it has a market capitalization of $1.08 billion yet quarterly revenues hover around $100 million, and in the last twelve months alone, total revenues hit $368 million.
Given that the company has generally reported quarterly revenue growth of around 20% or higher, the trajectory appears highly positive.
So why is the stock bobbling up and down like a yo-yo?
The short answer is that the pace of revenue growth has slowed considerably from 75.5% in the final quarter of 2021 to 18.7% in the most recent quarter.
Investors are clearly concerned that top line growth will turn negative and that would be a real concern for the already-struggling profitability.
As impressive as revenues and top line growth has been, so operating income has been disappointing. In the past 12 quarters, we couldn’t find a single one with positive operating income.
The Good, Bad & Ugly For Genius Sports
While the profit-and-loss statement is a mixed bag of impressive top line and disappointing bottom line, the balance sheet, at a glance, appears healthy with $89.8 million in cash against $13.5 million in long-term debt.
Where the financial picture gets a bit more blurry is when you zoom out and see the declining cash trajectory. The all-important cash reserves have fallen from $275.3 million in Q2 2021 to $89.8 million in Q2 of 2023. Clearly, the evaporation of around $185 million in cash over a two year period is not sustainable.
So for investors now the question is will Genius Sports find a way to stem the tide of operating losses. Concerns have been widely vocalized that Genius Sports overpaid for its contracts, and the financials appear to validate those worries.
To put it plain and simply, if Genius Sports were to burn as much cash in the next two years as it has in the past two the company would be insolvent. At the very least, a secondary offering diluting existing shareholders would be imperative.
On the plus side, management does appear to be acutely aware of the perilous financial situation. Cash dropped by the lowest amount, $4.6 million, on a quarterly basis from Q1 to Q2 this year. That improving trend will need to continue and reverse course to turn positive, and grow cash in future quarters if the company is to enjoy long-term success.
Wrap-Up
Genius Sports is a fast growth firm, albeit with a slowing pace of growth. And while profitability has remained elusive, earnings per share are increasingly trending in the right direction. EPS is almost at breakeven as of Q2 2023.
The balance sheet looks pretty good with more cash than debt, though it must be emphasized that cash has been on the decline for the past two years quite substantially. The most recent quarter-over-quarter cash reduction was the lowest on record, however.
Genius Sports shareholders must keep an eagle-eye on gross margins, which are persistently weak. In the final quarter of 2022, they were reported at just 3.0%, though they did spike to 28.4% in the most recent quarter.
Management also needs to make a concerted effort to turn operating income positive. To-date, the string of losses for 12 quarters in a row has been nothing short of disappointing.
Regardless, GENI stock at current prices makes for an enticing investment candidate. Genius Sports appears to be undervalued by a minimum of 30.9% according to a DCF analysis. Analysts are more bullish and forecast GENI share price will rise as high as 78.9% to $9.59 per share before fair value is realized.
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