Rush Street Interactive: Fairly Valued Amid Secular Tailwinds In Online Gaming

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Rush Street Interactive, Inc. (NYSE:RSI) operates successful the competitory online gaming and sports betting landscape, offering promising maturation prospects. Its committedness to lawsuit restitution strategically places it to pat into the imaginable of emerging markets, particularly in airy of the pivotal 2018 Supreme Court ruling. Yet, a elaborate investigation of its financials indicates that RSI faces operational and fiscal challenges that indispensable beryllium addressed to guarantee sustained profitability. Given the industry's dynamic nature, RSI's aboriginal trajectory mostly depends connected its quality to amended its nett and EBIT margins. While the institution seems to beryllium progressing positively, achieving affirmative EBIT margins by 2025 volition beryllium a cardinal determinant successful justifying its existent marketplace valuation. My valuation exemplary suggests that RSI is reasonably valued, truthful I springiness it a neutral rating.

Business Overview

RSI, primitively structured arsenic a blank cheque institution oregon SPAC, underwent a merger with dMY Technology Group Inc., efficaciously marking its introduction into the nationalist domain. Today, RSI operates successful the online casino and sports betting situation crossed the US, Canada, and Latin America, among different regions. It offers real-money online casinos, online and retail sports betting, societal gaming services, selling nether BetRivers.com, PlaySugarHouse.com, and RushBet brands. RSI’s gross exemplary is chiefly B2C with a increasing B2B aspect. Concretely, RSI provides an omnichannel platform for the land-based Sportsbooks astatine Rivers Casino Pittsburgh, Rivers Casino Philadelphia, Rivers Casino Schenectady, Rivers Casino Des Plaines, and French Lick Casino successful Indiana. So overall, RSI is simply a sprawling gaming cognition spanning 15 U.S. states and 3 planetary jurisdictions.

One of RSI's standout features is its absorption connected retaining and increasing regular users. According to RSI’s latest 10K, its user-centric loyalty program and the anticipation to beryllium "first to market" successful respective jurisdictions are 2 invaluable selling tactics. In my view, specified proactive marketplace introduction strategies tin connection a competitory edge, particularly successful an manufacture that values innovation and accelerated adaptation. Moreover, RSI’s maturation strategy relies connected technological advancement, exclusive contented access, and lawsuit scope expansion.

In fact, according to Eilers & Krejcik Gaming (“EKG”), the gross from the U.S. online sports betting assemblage reached astir $6.9 cardinal successful 2022. A much granular investigation reveals an awesome gross CAGR of 141% from 2019 to 2022. This robust maturation trajectory is attributed to 2 superior factors: the expanding fig of states regulating online sports betting and the nascent signifier of the market. EKG's projections bespeak a continuation of this upward trend. The forecast suggests that the gross from online sports betting is expected to transcend $14 cardinal by 2027. This projected maturation encapsulates the expanding regulatory support and the continued maturation of the market.

RSI's Investor Presentation Slides - August 2023

Secular Tailwinds and Untapped Growth Potential

However, the broader scenery of sports betting successful the U.S. experienced a transformative alteration connected May 14, 2018, erstwhile the U.S. Supreme Court declared the Profession and Amateur Sports Protection Act of 1992 unconstitutional. This landmark determination paved the mode for 35 states and the District of Columbia to legalize sports betting. Notably, retired of these 36 jurisdictions, 26 person embraced online sports betting, portion the remaining 10 person confined it to carnal venues similar casinos. I judge the 2018 Supreme Court ruling was a watershed moment, some legally and economically. The consequent maturation successful the assemblage has been thing abbreviated of remarkable, with projections indicating that online sports betting gross mightiness surpass $14 cardinal by 2027. However, considering that lone astir 47% of the U.S. colonisation presently has entree to online sports betting, I deliberation a immense untapped imaginable is waiting to beryllium explored.

EKG United States Sports Betting Policy Monitor – Released January 2023

The maturation successful online gaming, I believe, stems from regulatory shifts, tech advancements, and evolving user preferences. While sectors similar banking successful the U.S. adopted digitalization aboriginal on, the gaming industry's integer modulation has been much recent. Furthermore, developed nations, often with higher disposable incomes, pb this trend. Countries specified arsenic the U.K. and Denmark, categorized arsenic "high income" by the World Bank, person already embraced online gaming, hinting astatine a nexus betwixt economical well-being and gaming adoption. Yet, the U.S. remains a pivotal subordinate successful this arena.

Pennsylvania Gaming Control Board (left), New Jersey Division of Gaming Enforcement (right)

The online gaming and amusement industry, encompassing everything from lotteries to e-sports, represents much than specified entertainment. It's a confluence of assorted stakeholders, including casinos and sports teams, each shaping its trajectory. The industry's growth, marked by a 131% CAGR from 2019 to 2022, is undeniably impressive. I judge this surge results from regulatory changes and technological innovations. The U.S. market, successful particular, has shown promising signs, with a 63% summation successful online gaming revenues from 2021 to 2022.

I judge determination remains important untapped potential, particularly successful densely populated states similar California and Texas. Observing the U.S. landscape, the favoritism betwixt online casinos and sports betting becomes wide successful their maturation and state-level endorsements. Despite the instauration of online sports betting, New Jersey's accordant maturation successful online casino revenues mightiness beryllium a compelling exemplary for different states. I deliberation the U.S. online gaming manufacture is connected the brink of a important transformation. With the imaginable to make revenues of $48 cardinal and $23 cardinal for online casinos and sports betting, respectively, the aboriginal holds immense opportunities, particularly if nationwide legalization comes into play.

Valuation Analysis

RSI's performance successful Q2 2023 provides a deeper knowing of its fiscal trajectory. The institution reported a gross of $165.1 million, reflecting a 15% YoY growth, which is commendable. What's peculiarly noteworthy is the adjusted EBITDA profitability for this quarter, registering astatine a affirmative $1.2 million, particularly erstwhile contrasted with the EBITDA nonaccomplishment of $18.6 cardinal from the aforesaid 4th the erstwhile year.

Seeking Alpha positive author's elaboration.

This displacement underscores RSI's resilience and capableness to heighten operational ratio successful the look of marketplace changes. While achieving EBITDA profitability is simply a important milestone, the eventual extremity should beryllium accordant EBIT profitability, arsenic it offers investors a much factual measurement of success. The crushed is that EBITDA tin sometimes disguise definite expenses, whereas EBIT provides a clearer representation of operational performance.

Seeking Alpha positive author's elaboration.

RSI has experienced accordant revenue growth since 2020, with a CAGR of 22.2%, reflecting its effectual marketplace strategy and capableness to make value. Concurrently, the simplification successful EBIT nonaccomplishment astatine a CAGR of 35.9% indicates an efficiently increasing company. In 2025, gross projections are acceptable astatine astir $968.4 million, accompanied by a affirmative EBIT of $44.6 million. These figures underscore the company's promising trajectory, particularly considering my valuation model. Utilizing the FCFF DCF method and a CAPM discount complaint of 12.13%, I estimation RSI's existent worth to beryllium astir $1.04 billion. This suggests a flimsy 2.6% imaginable alteration from its existing marketplace position, starring maine to judge that the marketplace has mostly accounted for RSI's maturation potential. Based connected this analysis, RSI mightiness beryllium appropriately priced astatine present.

Seeking Alpha positive author's elaboration.

RSI's upward trajectory presents important potential, particularly successful untapped markets specified arsenic California and Texas. However, to genuinely harness this potential, RSI indispensable follow a broad strategy beyond specified top-line maturation and guarantee that specified maturation is reflected successful the bottommost line. I judge the cardinal to achieving this lies successful streamlining operations, optimizing costs, and emphasizing efficiency. While the company's caller show indicates a modulation phase, the travel to accordant profitability and enhanced shareholder worth demands continuous oversight, adaptability, and strategical planning. This is due to the fact that a company's occurrence is not conscionable astir capturing caller markets but besides astir businesslike absorption and foresight.

Conclusion

RSI looks similar a coagulated online gaming and sports betting business, showcasing a blend of maturation opportunities. Its customer-focused attack positions it good to capitalize connected emerging markets, peculiarly pursuing the 2018 Supreme Court decision. However, examining its fiscal performance, determination are operational and fiscal hurdles that RSI inactive needs to flooded for semipermanent profitability. In my view, the industry's accelerated improvement means that RSI's aboriginal occurrence hinges connected its dedication to enhancing its nett and EBIT margins. While RSI is connected a affirmative trajectory, by 2025, achieving affirmative EBIT margins volition beryllium important to validate its existent marketplace valuation. Based connected my analysis, RSI appears to beryllium appropriately priced, truthful I springiness it a neutral rating.

Follow maine for insights into undercovered and overlooked stocks that are imaginable hidden gems successful the market. My concern attack is balanced. I trust connected quantitative metrics portion ever remembering the qualitative communicative down each stock. I'm not acrophobic to spell against the atom if the numbers warrant it, ever successful pursuit of the astir close knowing of a company's potential. I clasp a Master of Liberal Arts (ALM) successful Extension Studies, tract of Finance, from Harvard University. My concern vocation has spanned assorted facets of the concern industry, from serving arsenic an expert astatine my country's banal speech to moving arsenic a sell-side expert and a stockbroker. Now arsenic a full-time investor, I person the further clip and absorption to supply much in-depth analyses of concern opportunities, and I'm highly grateful for this. Whether penning for fun, articulating my ideas, oregon sharing strategies, I purpose to supply worth connected your concern journey. "Veritas Super Omnia" (Truth Above All)