Spruce Point Capital Management, LLC, a New York-based investment management firm that focuses on forensic research and short-selling, on Thursday issued a research opinion on Genius Sports Limited.
According to the firm’s report, entitled “Mr. Irrelevant… It Doesn’t Take A Genius,” Spruce Point believes shares of Genius Sports face up to 60% to 80% long-term downside risk, or $3.25 to $6.50 per share.
Spruce Point disclosed it has a short position in Genius Sports Limited and owns derivative securities that stand to net benefit if Genius Sports’ share price falls.
In a statement released Thursday, Spruce Point noted Genius went public via a special purpose acquisition company (SPAC) in April 2021. “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 added it believes Genius has an “inferior” business model that will “result in poor margins as the company is at the mercy of large sports leagues.”
The firm said it expects“significant” near-term selling pressure on Genius Sports’ share price, estimating 35m insider shares will become unlocked next week after a 60-day period following the June 21 equity offering, 11.2m The National Football League (NFL) warrants are exercisable through next week, and 9.2m public warrants can be exercised on August 18.
Spruce Point said it urges investors to review key findings in its report and hold Genius Sports’ management accountable for answers to several issues the firm raises, including Genius’ stated revenue growth, what the firm termed “multiple signs of potential financial strain,” Geniusbetting on being able to secure exclusive, yet expensive, partnerships with sports leagues, revenue attributed to “noncash consideration” as a result of value-in-kind/contra deals, which Spruce Point asserted raises “significant” concerns regarding Genius’ revenue recognition and growth, and what Spruce Point said was a “stretched” valuation.
“We are concerned with Genius’ revenue growth and multiple signs of potential financial strain” Spruce Point said.
The firm noted Genius has received one-time benefits from the acquisition of new league rights, including the Premier League and most recently, the NFL. According to Spruce Point, Genius pays “considerable” fees for its sports data rights, including approximately $120m per year for the NFL, which it said 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 said, adding the firm finds Genius Sports’ 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.
Based on conversations with industry experts, Spruce Point said it believes revenue shares are typically in the range of 1.5% - 2.0% for Tier 1 exclusive deals compared with Genius Sports’ 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,” Spruce Point said.
Regarding partnerships with sports leagues, Spruce Point said it believes the value of US 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.
Value of contra deals is subjective
As part of contra deals, Spruce Point said 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, the firm noted these deals have 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,” Spruce Point said, adding, “Our biggest concern is management’s ability to potentially manipulate the ‘fair value’ assigned to these services, inflating revenue and growth.”
Spruce Point also took issue with Genius Sports’ valuation, calling it “stretched” and arguing it is 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,” the firm stated.
Spruce Point noted 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,” the firm said. “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.”
