Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on Genius Sports Limited (NYSE: GENI)
NOTE TO EDITORS: The Following is An Investment Opinion Issued by Spruce Point Capital Management
Finds Evidence That Genius Will Be Subject To Margin Pressure And Potential Disintermediation As a Middleman Between Sports Leagues and Sportsbooks
Highlights That Genius Is Paying ~$120 Million Per Year For Its Partnership With The NFL, And Is Unlikely To Recoup The Costs Through Profitable Monetization
Expresses Concerns About Genius’ Revenue Quality, Which Contains Various Value-in-Kind (Barter) Transactions
Asserts That DraftKings And Consumer-Focused Brands Will Be Better Positioned To Benefit From Industry Growth Due To The Increased Legalization Of Sports Betting In the U.S.
Sees Near-Term Risks From Lock-Up And Warrant Expiry, and 60% to 80% Long-Term Downside Risk To Genius’ Share Price And Urges Investors To Visit www.SprucePointCap.com And Follow @SprucePointCap On Twitter For The Latest On $GENI
August 05, 2021 09:00 AM Eastern Daylight Time
NEW YORK--(BUSINESS WIRE)--Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled "Mr. Irrelevant… It Doesn’t Take A Genius” that outlines why we believe shares of Genius Sports Limited (NYSE: GENI) ("Genius" or the "Company"), face up to 60% to 80% long-term downside risk, or $3.25 - $6.50 per share. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and exclusive updates.
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Spruce Point Report Overview
Genius went public via a special purpose acquisition company (“SPAC”) in April 2021, and while the market’s current view reflects the growth prospects of the sports betting industry, in reality, we believe Genius is just another intermediary that provides similar data to its competitors and will likely fail to capitalize on wider industry growth. Spruce Point believes Genius has an inferior business model that will result in poor margins as the Company is at the mercy of large sports leagues.
We expect significant near-term selling pressure on the share price. We estimate 35 million insider shares will become unlocked next week after a 60-day period following the June 21st equity offering, 11.2 million The National Football League (“NFL”) warrants are exercisable through next week, and 9.2 million public warrants can be exercised on August 18th.
We urge investors to review key findings in Spruce Point’s report and hold management accountable for answers to the following issues:
- We are concerned with Genius’ revenue growth and multiple signs of potential financial strain. Genius has received one-time benefits from the acquisition of new league rights including the Premier League and most recently, the NFL. Genius pays considerable fees for its sports data rights, ~$120 million per year for the NFL, which have yet to generate substantial profits for Genius or Sportradar, the past owners of the NFL rights who did not find the current price economical. Our research shows a significant disconnect between management’s guidance and reality. Spruce Point finds management’s promoted $60 billion total addressable market (“TAM”) includes pre-match betting (Spruce Point estimates ~30%), where it is hard to charge revenue share as there is no value in exclusive data. Additionally, based on conversations with industry experts, Spruce Point believes revenue shares are typically in the range of 1.5% - 2.0% for Tier 1 exclusive deals compared with the Company’s presented 5%. At the end of the day, Genius is an intermediary, or middleman, that provides data from sports leagues to sportsbooks and, as a result, will likely be subject to margin pressure from both sides, as well as potential risk of disintermediation.
- Genius is not a “bet on every horse” – it is a bet on being able to secure exclusive, yet expensive partnerships with sports leagues. Spruce Point believes the value of U.S. sports leagues’ data rights will be high enough that they will not generate considerable profits for data providers because the economics are captured by the leagues. The price of the NFL rights appears to put significant pressure on Genius’ bottom-line for the next few years, and we find evidence that the previous NFL partner, Sportradar, never made a profit on its $20 million per year deal. Sportradar is Genius’ largest competitor and is backed by high-profile investors, including multiple NBA owners (Michael Jordan, Mark Cuban, and Ted Leonsis). While investors may draw comparisons between Genius and high flying DraftKings (NASDAQ: DKNG), DraftKings and other consumer-focused brands seem better positioned to benefit from industry growth, including the opening of sports betting in the United States. Genius’ key revenue driver is sportsbooks customer growth while online gaming peers will benefit directly from the growth of dollars waged. It is unlikely sportsbooks will be willing to concede meaningful economics to data providers, especially for non-exclusive data.
- Revenue attributed to “noncash consideration” as a result of value-in-kind / contra deals, raises significant concerns regarding Genius’ revenue recognition and growth. As part of contra deals, Genius exchanges its services (e.g. software) for the rights to leagues’ data and sells the data to sportsbook customers. Given the subjectivity and managerial discretion on placing values for exchanged services in barter transactions, they have often been heavily scrutinized by the SEC and are susceptible to accounting fraud. From our conversation with a former Genius Sports Manager, it is unlikely that the sports league partners have the means to pay the assigned values of Genius’ services stated in the partnership contracts. Our biggest concern is management’s ability to potentially manipulate the “fair value” assigned to these services, inflating revenue and growth.
- Stretched valuation likely to compress, leading to significant downside risk. With a market capitalization of over $3 billion, implying a 2021 revenue multiple of approximately 13x, Spruce Point believes Genius’ valuation is beyond reason. Genius trades at a premium to most of its online gaming industry peers based on 2021E & 2022E revenue multiples, despite having the second lowest 2022E revenue growth rate. Lower than average growth combined with what Spruce Point believes to be an inferior distribution business model should result in a valuation at a significant discount to consumer-facing online gaming business. Spruce Point believes Genius’ shares have significant long-term downside to our price target range of $3.25 - $6.50 per share, below the $10 acquisition price where its previous private equity sponsor sold shares in its IPO. In the near term, we expect selling pressure from insider shares coming unlocked, and from in-the-money warrants that can be exercised.
The research note can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
