Pointsbet Holdings Ltd (ASX: PBH) is a corporate bookmaker, much like familiar brands such as Sportsbet and Ladbrokes. The company has developed a scalable cloud-based wagering platform through which it offers its customers innovative sports and racing wagering products.
Pointsbet is the cream of the crop when it comes to growth potential due to its positioning in the United States (US) sports betting market. Sports betting was previously illegal in the US until the Professional and Amateur Sports Protection Act of 1992 was challenged in May 2018. As a result, states can now independently decide whether they want to pass legislation to legalise sports betting. The benefit of a state legalising sports betting is that it can sell sports betting licences and collect additional tax dollars from bookmakers.
Pointsbet's growth so far
Pointsbet had an IPO offering price of $2 and currently trades for around $5.30 – so its shares are honing in on a threefold return since listing.
The company announced its maiden Q4 Appendix Cash Flow Statement in August last year. At face value, the report was a double-edged sword. It highlighted year-on-year growth of 172% in net revenue to $25.6 million, a 254% rise in registered clients and a 244% increase in turnover to $567 million. Pointsbet cited its turnover market share in New Jersey was 5.4% in June 2019, up from 2.2% in February 2019. Despite the significant growth across all business metrics, the company booked a $41.9 million loss, primarily due to marketing and promotion expenses.
Two months later, Pointsbet announced an enormous $122.1 million capital raising to fuel its growth. The capital raising was well received with 99.65% of investors participating.
Investors might be shocked as to why a company with such a significant loss continues to see its share price push higher. But let me explain.
The opportunity
Sports betting has now been adopted by some 14 states and a controlled market is now being offered by Illinois, Montana, New Hampshire, Tennessee and North Carolina. Pointsbet is currently operating in New Jersey and Iowa, with pending access to Michigan.
If we just take New Jersey, for example, it is currently the second largest legal sports betting state in the US. In 2019, New Jersey had a handle (amount wagered) of approximately US$4.02 billion (excluding December) with a hold % (how much bookmakers keep as revenue) of approximately 6.9%, or some US$277.4 million in potential revenue.
In Pointsbet's Q1FY20 update, it cited a turnover of A$235.8 million and a record New Jersey market share of 6.7%. If we give Poinstbet the full calendar year with a baseline handle of US$4.02 billion and a 6.7% market share, that would equate to a handle of more than US$250 million or almost US$20 million in revenue in just 1 US state!
Foolish takeaway
Pointsbet is still in its early days but there is a clear opportunity for this company to capitalise on the legalisation of sports betting. It has so far evidenced a growing user base and competitiveness to gain market share. While Pointsbet might not fit the risk appetite of some investors, this is definitely a stock to watch in 2020.
