Sports data and analytics firm Genius Sports is the top stock pick for 2023 by Needham & Co. and equity analyst Bernie McTernan, who says shares of the company could more than double in the months ahead.
“U.S. sports betting is still in growth mode and Genius balances profitability and growth,” McTernan said in a phone call. The analyst expects Genius to have positive earnings before interest, taxes, depreciation and amortization (EBITDA) for the full year—the profitability he expects—and to benefit from a combination of the still-growing online sports betting U.S. market and fiscal discipline on holding corporate costs steady.
McTernan covers internet, entertainment and consumer stocks for Needham, a New York based brokerage, and sees sports betting as the best-performing sector this year in his portfolio, which includes ratings on AirBNB, Amazon.com, Peloton and Uber, among more than a dozen others. Based on his valuation metrics, the analyst suggests the market will support a $7 share price for Genius by year’s end, a price that would be slightly more than double the price when he distributed the report to Needham clients Friday.
In the report, the brokerage says it sees online sports betting as less cyclical than other sectors, reasoning that betting has been more resilient in past recessions and that an economic downturn could spark more pro-betting legislation by tax-hungry states. Sports wagering also remains fast-growing, with U.S. bettors doubling the amount wagered from October 2021 through October 2022, according to the report. Some $73.3 billion of bets were placed on sports online in 2022 compared to $3.1 billion in 2019, according to Needham, which cites data from Variety Intelligence, which shares its publisher with Sportico.
In Genius’ case, the company has large fixed costs associated with its rights to official league data, including the NFL’s. In 2022, those rights as well as Genius’ operational expenses equaled roughly 70% of the company’s revenue, according to the report. While the high costs have likely been part of the bearishness on Genius stock in recent months, McTernan notes that Genius can scale up revenue much faster on those fixed costs than the costs themselves will rise, meaning the company has lots of operational upside. “Media is a fast-growth business for them, which is higher margin than their other segments,” McTernan said. In particular, he sees the use of media services as a way for sports books to find new customers as particularly bullish.
Needham estimates Genius will generate $390 million in sales in 2023, with adjusted EBITDA of $41 million (his published estimate doesn’t include a net profit or loss estimate). By the end of 2024, Genius could have sales of $478 million, according to the report. Longer-term, McTernan also favorably cited Genius’ work with the NFL and Amazon’s NFL telecasts as positive harbingers for future work with the league and broadcasters.
Genius Sports shares closed Monday trading on the Nasdaq Stock Market at $3.71.