It has been a disappointing year for the Jumbo Interactive (ASX: JIN) share price.
The online lottery ticket seller and operator of the Oz Lotteries website has seen its shares fall ~25% since the start of 2020.
This poor form has culminated in the company being dumped out of the S&P/ASX 200 Index (ASX: XJO) at the next rebalance on 22 June.
Why is the Jumbo share price down 25%?
Investors have been selling Jumbo's shares this year for a couple of reasons.
The first is its investment in growth opportunities, which is expected to temporarily soften its margins.
This was evident in its first half result when Jumbo delivered a 23% increase in revenue but a 14% lift in net profit after tax. Quite a contrast to previous years where its profit growth has thoroughly outpaced its revenue growth.
What else is weighing on its shares?
The other potential reason for its share price weakness is Tabcorp Holdings Limited (ASX: TAH) reporting quicker growth in its digital lottery ticket sales.
In the first half, the gambling company reported a 39.8% increase on the prior corresponding period. This compares to a 25% lift in transaction value by Jumbo during the half.
This has sparked fears that Tabcorp will be less reliant on Jumbo to sell its tickets in the future and could be in a stronger negotiating position when Jumbo's reseller contract ends in 2022. The worst-case scenario would be Tabcorp showing Jumbo the door completely.
Though, it is worth noting that Tabcorp is a substantial shareholder in Jumbo and the two parties have worked together successfully for years. I feel this means it is unlikely to do anything that would impact the value of its shareholding.
In addition to this, with Jumbo expanding internationally, in the coming years it will be less reliant on the Australia market. In fact, it is thanks partly to its expansion plans that Jumbo is aiming to generate $1 billion in global ticket sales annually through its platform by FY 2022. This will be triple what it achieved in FY 2019.
Should you invest?
I'm optimistic that Jumbo and Tabcorp will extend their reseller agreement in 2022.
However, until this happens, the uncertainty is likely to weigh heavily on the company's shares. This could mean they continue to underperform during the near term until things become clearer.
Nevertheless, I still believe Jumbo could be a great long term investment option for patient investors due to its sizeable global market opportunity.
Incidentally, this morning Jumbo requested a trading halt, pending the release of an announcement in relation to its reseller operations in Western Australia. No details have been released as of yet, but this could potentially shed some light on its future. I would suggest investors keep a close eye out for that announcement.
