Thesis

Gambling.com Group Limited (NASDAQ:GAMB) is a small-cap company that mainly focuses on affiliate marketing in both the U.S. and European markets, targeting iCasino and sports betting operators. In my perspective, considering the high growth rates of sports betting and online casinos in the U.S., GAMB is likely to benefit from the favorable environment in the coming years. With more room left to grow, I recommend investors accumulate stocks whenever there is a price adjustment.

Overview of the business

Sports betting affiliate marketing is a method for marketers, such as Gambling.com, to earn a commission by directing customers to operators such as DraftKings Inc. (DKNG) and PENN Entertainment, Inc.’s (PENN) ESPN Bet. Affiliate marketing companies receive payment when online gamblers register through one of the company’s websites and make a deposit.

Gambling.com Group operates core brands such as Gambling.com, Rotowire.com, and Bookies.com, along with several smaller brands like BetOhio.com and BetVirginia.com. According to the company’s recent annual report, roughly 60% of the revenue in 2023 was related to sports betting, whereas 30% of the revenue was related to the casino. When disaggregated by regions, 70% of the revenue was derived from North America and 23% from other parts of Europe. Considering the high growth rate of the sports betting product type, I believe it will be the main growth engine in the coming years.

There are three methods for payments. One is the revenue-sharing model, in which the company receives a proportion of the revenue created by referred customers. Cost per acquisition is a pricing model that customers pay a fee to the company each time they are directed. The hybrid model is a combination of the two. Gambling.com is applying all three methods.

Profitability

Thanks to the sports product type, the company showed a rapid revenue growth rate, recording 81% and 42% respectively in 2022 and 2023. On the margin side, the gross margin in 2023 was roughly 91.6%, which decreased from roughly 96.1% in 2022. The drop in the margin was mainly due to an increase in partnerships with media companies. From my perspective, even though it is likely that the gross margin will not go back to the level seen in 2021 or 2022 because the proportion of revenue from media partnerships would increase, the margin is still comparatively high. The company’s business model does not require high costs to operate, leading to higher conversion rates of revenue to profits. Regarding the operating margin, it has increased from roughly 17% in 2022 to 27.4% in 2023 thanks to less spending on selling and operating expenses.

These revenue growth rates and margins appear more outstanding when compared to one of the company’s competitors, Catena Media. Catena Media, listed in Stockholm with the ticker CTM, operates as an affiliate marketing company like Gambling.com and generates roughly 88% of its revenue from the U.S. According to the recent Catena Media annual report, total revenue in 2023 dropped by 22% and the EBITDA margin decreased by 16 percentage points, whereas Gambling.com is maintaining exponential growth rates.

Financial Soundness

On the balance sheet, the company holds more cash & cash equivalents than total debt and generates steady EBITDA, indicating that credit events are unlikely over the next few years. However, there are two points that investors should consider: an increase in debts or stock issuances due to M&A activities. In my opinion, the company will likely continue to pursue acquisitions to expand its market share or business scope, considering the limitations of organic growth. During past conference calls, the management expressed its intention to seek suitable acquisition targets. In fact, the company recently established a $50M credit facility with Wells Fargo Bank and has the ability to issue more stocks to raise funds. Although the current financial strength is robust, investors should monitor whether the company overextends itself in purchasing other companies.

History & Valuation

History

Before jumping into valuation, I believe it’s beneficial to examine the historical performance of GAMB’s stock to understand significant momentum shifts or issues. In 2021, following its listing on Nasdaq, the company experienced a surge in stock price due to IPO momentum, reaching an all-time high. Concurrently, sports betting-related stocks like DraftKings Inc. (DKNG) began to decline from their peaks. Despite GAMB’s rapid growth fueled by its sports product in 2022 and news of media partnerships, the stock price failed to exhibit significant upside momentum. This lack of movement was somewhat expected given the unfavorable investment climate in 2022.

In 2023, although the company consistently reported strong quarterly earnings, the stock price remained stagnant until July. Following a drop in stock price resulting from previous investors, such as Edison Partners, selling their shares through secondary offerings, the stock showed good performance thanks to good second-quarter earnings. However, subsequent financial results seemed to disappoint investors, leading to the current situation where the stock price is fluctuating within a narrow range.

In my assessment of GAMB’s stock price history, three factors stand out as crucial. Firstly, apart from earnings, there are a few significant momentum drivers for this stock. So the examination of earnings and valuation is important. Secondly, investors need to be patient, as linear increases in stock prices are unlikely in the near future. Thirdly, the current stock price is closer to the historical bottom than the peak. The stock’s historical high is roughly between $13 to $14, whereas the bottom is roughly between $6 to $7.

Valuation

I believe the purpose of doing a valuation of a company is not to calculate the exact future stock price, but to check whether the probability of earning money is higher than losing when investing in the stock. For this purpose, I would use the P/E multiple methods to find out whether GAMB is expensive or not.

• Price*Quantity-Cost Analysis

To come up with a P/E multiple, I would like to go over disaggregate earnings into three segments.

Price: I assume the price for the company’s product would remain stable. Due to the intense competition in affiliate marketing, it would be challenging for the company to increase earnings by raising prices. However, operators are also spending money on marketing to acquire customers. In this environment, the fee for affiliate marketing is likely to remain at the current level.

Quantity: When considering the growth of the sports betting industry and competition among sportsbooks, the demand for affiliate marketing is likely to increase. For tax revenue, I believe more states would be open to sports betting, leading to an overall increase in the size of the sports betting industry. Moreover, sports betting operators aiming to raise market share, such as ESPN Bet, would partly depend on affiliate marketing companies.

Cost: The margin is likely to drop as the proportion of revenue generated by partnerships with media companies increases. Moreover, costs related to M&A may occur in the near future

• Valuation

Taking the company’s 2024 outlook into account, I would assume that the revenue for 2024 would increase by 21%, which is $131 million. For the gross margin, because of the cost factors I mentioned above, I assume that it would drop to 88% from 92% in 2023. Accordingly, the operating margin would fall to 22%. For the tax expenses, I’ve used 9%, which is similar to that of 2023. As a result, the range of forward P/E multiple based on my assumptions would be 13 to 15. When considering the guidance for the revenue growth in 2024 is 21%, I believe the current valuation is undervalued.

The reason why my projection of net income is high when compared to 2023 is because I’ve excluded fair value movements on contingent consideration because I believe this does not have a continuing effect

Risk

• Intense competition.

Referring customers through websites has few barriers to entry for other companies. If the margin of affiliate marketing in sports betting increases, then there would likely be more competitors.

• M&A Issues.

Organic growth would be limited, so the company may continue to spend money to acquire websites or companies. Through this process, the company may issue more shares or increase debts, potentially deteriorating financial soundness or increasing the possibility of dilution.

Conclusion

In my perspective, considering the bright prospects of the sports betting industry in the United States, the company is likely to continue growing. Moreover, as the current valuation of the company is undervalued, I recommend investors accumulate the stock as the price is more likely to increase in the coming years.