Down 63% from its initial public offering in 2021, Sportradar (SRAD -0.65%) is a shining example of why investors should usually wait to see a few quarters of earnings data from a newly public company before buying.
By providing sports data, content, and technology to betting operators, sports leagues, and media companies, Sportradar plays a mission-critical role in the quickly growing sports betting industry.
This combination of discounted share price and importance to a rapidly growing industry has caught the attention of four Wall Street analysts over the past month. Each has placed a price target of $15 or higher on the stock with the belief that Sportradar currently offers at least 50% upside over the next year.
Whether or not it happens over the next 12 months, I believe these analysts will be proven correct over the only time frame that matters -- the long term. Here's why.
Sportradar: Powering the quickly growing sports betting industry
According to Polaris Market Research, the global sports betting industry will grow 12% annually through 2030 to nearly $200 billion. As a critical "picks and shovels" provider to this burgeoning market, Sportradar looks well-positioned to capitalize on this undeniable megatrend.
Here are the company's three customer groups and the solutions it provides for each:
- Betting operators: By serving sportsbooks such as Caesars, MGM, and DraftKings, Sportradar's managed trading services platform provides real-time data (play-by-play info), odds, and stats. Additionally, the company offers audiovisual content, such as graphics that overlay live betting odds onto a sports broadcast, enabling frictionless real-time betting.
- Sports leagues: Sportradar is an intermediary between sportsbooks and sports leagues, holding data and media rights with the National Basketball Association (NBA), National Hockey League, and Major League Baseball (among many other international leagues). The company provides integrity services to the leagues to combat corruption and match-fixing and offers various fan engagement tools.
- Media companies: Sportradar offers streaming services for events that may not typically have standard broadcast coverage in certain areas. In addition to the video content itself, the company provides data-driven insights that broadcasters and streamers can use in graphics and delivers various advertising solutions.
This three-sided network leaves Sportradar well-positioned to capitalize on various network effects as it grows stronger with each new betting operator, sports league, or media company that joins. A perfect example is Sportradar's recent exclusive data partnership with the NBA, which significantly increased commercial deals with Caesars Sportsbook and BetMGM, as they rely upon this data.
Thanks to the synergies provided by these network effects, the company's sales have grown by 20% or more in each of the last three years. Despite these impressive figures, Sportradar's most robust growth may still be ahead.
In addition to landing the NBA deal (basketball is the most bet-upon sport in the U.S.), the company bought data and streaming rights from The Association of Tennis Professionals (ATP) for the next six years. Tennis is the second-most bet-upon sport globally. Powered by these new sports leagues and a fledgling U.S. betting market that could still quadruple in size by the time it matures, Sportradar's growth story could still be in its early chapters.
The cherry on top for investors? In addition to management guiding for another year of 20% sales growth in 2024, the company appears to have finally hit an inflection point on profitability and could become a cash machine over the long haul.
Image source: Getty Images.
Turning the corner on profitability and positive cash generation
In 2023, Sportradar delivered breakeven profitability and positive free cash flow (FCF) generation simultaneously for the first time in its publicly traded history.
SRAD Profit Margin data by YCharts
With management laser-focused on buying sports rights with a clear path to an outsize return on investment, the company has finally reached a tipping point in achieving self-sufficiency. To highlight this point, consider Sportradar's impressive cash from operations creation compared to its capital expenditures (most of which consist of sports rights purchases).
SRAD Cash from Operations (TTM) data by YCharts
The positive FCF generation (cash from operations minus capital expenditures) creates a natural flywheel effect for Sportradar as it grows. As FCF levels increase over time, the company will have more available cash to buy new rights with, generating more FCF from a more robust network, and so on.
This budding FCF generation also gave management the confidence to initiate a new $200 million stock buyback plan. Accounting for roughly 7% of the company's total market capitalization, these buybacks could generate immense value for shareholders. With Sportradar shares trading at a reasonable 30 times next year's earnings, considering its historical (and expected) 20% sales growth rates, management is not-so-subtly hinting that it believes the company's shares are undervalued.
With management and analysts agreeing that Sportradar's shares are cheap, it looks like a top growth stock to consider as a critical provider to the rapidly growing sports betting industry.