Why Is Genius Sports Stock Down?

ARK Invest founder, CEO, and CIO Cathie Wood doesn’t shy away from high-risk stocks. She examines emerging companies to identify those with strong growth potential, and then chooses what she and her investment team perceive are the best for inclusion in the ARK family of funds. 

Of course, not every new company is a candidate for Cathie Wood’s funds. She and her firm are focused on disruptive innovation. Specifically, she is looking for technology that will “change the way the world works and deliver outsized growth as industries transform.” That generally includes companies advancing 3D printing, Artificial Intelligence (AI), Autonomous Vehicles, DNA sequencing, fintech, and robotics. 

ARK funds enjoyed tremendous gains and widespread admiration when tech stocks went up in 2020. The next two years brought sharp losses, but ARK funds are starting to recover in 2023. Wood is still willing to take risks, but followers have noticed that she is a little more discerning these days. 

For example, in early August 2023, ARK sold nearly 120,000 shares of Genius Sports – a company she had been buying steadily since it started trading on the New York Stock Exchange (NYSE) on April 21, 2021. Granted, those 120,000 shares are a relatively small portion of ARK’s total position in Genius Sports, but the transaction appears significant given the fact that Genius Sports stock has started to drop. 

Why is Genius Sports stock down? And what are the chances that it will recover? Most importantly, is Genius Sports stock a buy? 

What Does Genius Sports Do? 

The legalization of online sports betting is spreading across the United States, and a number of tech companies are in on the action. FanDuel, DraftKings, and Penn Entertainment are three of the leading sports betting platforms, and they are in direct competition for the same customers. 

Genius Sports isn’t a sports betting platform. It is designed for an entirely different purpose, and it is the only company in its particular niche. Genius Sports gathers data on sporting events and uses machine learning to analyze and predict the outcomes of future events. That’s a valuable resource for any company in the business of sports betting. 

Because Genius Sports collects data by monitoring events in real time, a natural extension of the business is delivering that real-time information to other interested parties. Organizations like the NFL, MLB, and PGA have taken Genius Sports as their partner for distributing play-by-play statistics to media companies in addition to sports betting companies. 

All Genius Sports products are designed for scalability, and the client list keeps growing – along with the number of events covered. To date, Genius Sports says it has covered more than 240,000 sports events, and the total number of long-term partnerships tops 650. 

Why Did Genius Sports Stock Go Down? 

Genius Sports announced its second-quarter 2023 earnings on August 7, 2023, and share prices dropped right away. At first glance, that might be surprising, considering revenue was up 22.12 percent year-over-year at $86.8 million. Analysts had estimated revenue at $80.2 million, so the results would appear to be a win for Genius Sports. 

The trouble is that earnings per share (EPS) didn’t exceed analysts’ expectations. In fact, EPS fell short. Analysts had projected a loss of $0.04 per share, and the actual results were a loss of $0.05 per share – a 25 percent difference.  

Genius Sports has a market cap of approximately $1.4 billion – down more than 70 percent since public trading began. It lost 25 percent of its value in the week following the second-quarter earnings report. However, the stock is still up more than 83 percent year-to-date on the strength of its first-quarter earnings and a larger upward trend across the tech industry. 

Is Genius Sports Stock A Buy? 

Understanding whether Genius Sports stock is a buy relies on identifying the root cause of the earnings miss. The company is growing quickly, and it has taken an aggressive approach to securing big-name partnerships. That strategy is critical to long-term success, but in the short term, it’s very expensive.

Increased revenues offset some of that expense, but it is possible that Genius Sports hasn’t found the right balance yet. That possibility seems to be the reason Genius Sports stock went down after second-quarter earnings were released. 

However, members of the leadership team are confident that the balance is just right. They explained that the higher-than-expected loss wasn’t related to the company’s performance. They said performance had actually improved, EPS notwithstanding.

They told shareholders that the loss from operations was ($39.7 million) for the second quarter of 2022 and just ($7.8 million) for the second quarter of 2023 – a dramatic improvement. However, the company experienced a $29 million reduction in gain on foreign currency compared to the prior year period, which increased the net loss to ($10.3 million). 

Genius Sports’ leadership is optimistic about the rest of 2023 and beyond. During the earnings call, Co-Founder and CEO Mark Locke said: 

We enter the second half of 2023 having reached a significant inflection point in our business. Following the financial outperformance in the first half of the year and the recently renewed partnerships with FDC and the NFL, we have validated our core strategy, differentiated our technology stack, and proven our sustainable business model. 

The ongoing success through the second quarter perfectly demonstrates our balanced approach in delivering near-term results, while accelerating Genius towards our long-term growth and profit targets.

The company raised guidance for the remainder of the year and announced that it expects to generate sustainable free cash flow within the next two quarters. The new revenue projections are $410 million, with an Adjusted EBITDA of $52 million for the year. 

All but one of the ten analysts who gave an opinion on Genius Sports have rated it a buy. Their median target price is $9.50, which represents a gain of more than 50 percent over the next 12 months. 

Chances are, Cathie Wood hasn’t lost faith, either. There are many reasons she might have chosen to trim ARK Invest’s position in Genius Sports. The stock does remain in the high-risk category, but investors who were comfortable with that risk before the earnings report can remain so.

Investors with a high risk tolerance should take advantage of the price drop to expand their position in Genius Sports at a discount. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.