Are short sellers wrong about Pointsbet shares?

Some investors are betting on Pointsbet shares to drop.

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Key points

  • Pointsbet shares have sunk in the last year, dropping around 60%
  • However, the company's turnover and net win statistics continue to grow
  • Pointsbet also continues to have a large amount of cash to fund its northern hemisphere growth plans

The Pointsbet Holdings Ltd (ASX: PBH) share price has performed terribly over the last year. Its share price is down by close to 60%.

Pointsbet describes itself as a corporate bookmaker with operations in Australia, the US, Canada, and Ireland. It has developed a "scalable cloud-based wagering platform through which it offers its clients innovative sports and racing wagering products, advance deposit wagering on racing (ADW) and iGaming".

Strong betting that Pointsbet shares will fall further

The concept of short selling means that investors are essentially betting that the share price is going to go down.

As noted by my colleague James Mickleboro, Pointsbet is (or was) one of the most shorted ASX shares, with a short interest of 7.3%. Mickleboro mentioned competition and cash burn concerns as potential reasons why the shorters may be circling.

The company recently reported its FY23 half-year result, which showed that normalised earnings before interest, tax, depreciation and amortisation (EBITDA) came in at a loss of $149.1 million. This was worse than the $126 million loss in the prior corresponding period.

The company's operating cash flow outflow also worsened from $78.3 million in HY22 to $103.6 million in HY23. Net operating cash flow, excluding movement in player cash accounts, was an outflow of $123.2 million.

Pointsbet attributed these difficult numbers to more spending on marketing, increased operations, and continued scale operational capabilities.

Are there positives?

I think shorters are being overly pessimistic considering the Pointsbet share price has already fallen so heavily.

The company noted that it's expecting the FY23 second-half net cash outflow, excluding movements in player cash, to be approximately 30% lower than in the first half of FY23. That would be a big improvement.

Pointsbet also thinks that the second half's normalised operating expenses will reflect a stabilised cost base.

The gross profit margin is expected to improve in the second half with operating scale in North America. That could be a key help for the Pointsbet share price.

Its revenue-related numbers are growing at a good pace. In the HY23 result, the company revealed its sports betting turnover jumped by 40% to $3.2 billion, while the total net win increased 24% to $182.2 million.

The US is a huge market for Pointsbet to expand into and the steady growth of the company in additional US states is promising, thanks to laws that have been changed to allow sports betting.

It pointed to a renewed and disciplined focus on cost efficiencies, combined with "strong revenue growth, delivering increased operational leverage".

Management is expecting that the FY23 second-half normalised group EBITDA loss will be between $77 million to $82 million, down from a loss of $117.6 million in the prior corresponding period.

While it is still making losses, the business had $387.2 million of cash at the end of December 2022, though $66.5 million of this represents client cash. But it had no borrowings.

It still has plenty of cash and will hopefully reach cash flow breakeven status before running out of money, requiring capital raising.

Foolish takeaway

The business does face some problems, but there's a very good chance that the company will be able to grow and benefit from scale advantages.

The Pointsbet share price may well fall from here in the short term but I think in the longer term, the outlook is promising for the business as it expands in the northern hemisphere.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended PointsBet. The Motley Fool Australia has recommended PointsBet. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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