It has been a topsy-turvy few years for long-term shareholders of digital lottery business Jumbo Interactive Ltd (ASX: JIN). After surging from below $10 to almost $30 by October 2019, the Jumbo share price dropped off a cliff. The fall was precipitated by panic-selling as the spread of COVID-19 wreaked havoc across global share markets, and by March Jumbo shares had dropped back below $10 again.
Since March, the Jumbo Interactive share price has recovered slightly and is trading at $13.87 as at the time of writing. However, this is well short of the lofty highs of around $27 the company's shares had hit back in October 2019.
But major broker Goldman Sachs Group still feels bullish about the prospects for Jumbo Interactive shares. The broker believes that most of the worst market conditions are behind Jumbo, and that it actually has some unique business opportunities over the next 12 to 24 months.
What Goldman likes about the Jumbo share price
One of the key items highlighted by Goldman was the recent deal struck between Jumbo and Western Australian Government-owned Lotterywest. Under the deal, which was announced back in November, Jumbo will provide its online software platform to Lotterywest, and will receive a 9.5% service fee for each transaction processed. The deal is for up to 10 years but can be reviewed in years 3 and 6 by Lotterywest.
According to Goldman, the successful integration of Lotterywest could provide Jumbo with significant tailwinds, and even lead to further domestic and offshore contract wins. Without providing specifics, Jumbo has flagged the potential for software-as-a-service (Saas) business opportunities across the United States eastern seaboard. The company was also recently granted a licence to supply its software platform to lottery operators in Great Britain.
While long-term shareholders will be pleased that Jumbo now has Goldman's recommendation, they may be a little disappointed with the 12-month price target of just $14.50 the broker has put on Jumbo shares. This means that it could be a long time before the Jumbo share price is back within touching distance of $30.
Goldman does identify a number of key risks associated with an investment in Jumbo. Changes in gambling regulations are always a threat to the industry and could potentially disrupt Jumbo's business model or even lead to increased competition by making it easier for new entrants in the lottery sector.
The other, potentially more obvious, risk is the possibility of Jumbo's SaaS business falling short of expectations. A fair amount of the bullish outlook on the Jumbo share price is focused on the company's SaaS runway, both at home and abroad. If the company can capitalise on the momentum generated by its Lotterywest contract, this will go a long way towards unlocking the value Goldman sees in Jumbo shares.
